Five 401(k) Mistakes That Can Cost You Money and Peace of Mind
As a Christian business owner, are you are attempting to integrate biblical principles into every aspect of your business? How about your retirement plan? Is it even possible to honor God through your 401(k) plan? If yes, how?
There are a number of factors that impact the stewardship of your retirement plan, and as a plan sponsor you may have much more responsibility than you realize. Here are the common areas where business owners may be at risk and it’s costing them money.
- Who’s on The Hook? Your financial advisor likely refers to this as your “fiduciary responsibility”. Did you know that business owners bear personal liability as the “Fiduciary” of their company retirement plan? As such, it is your responsibility to:
- manage the plan assets prudently
- act with complete loyalty to the plan,
- avoid conflicts of interest
- act solely in the best interest of plan participants
- and, to assume personal responsibility and accountability for their actions and advice.
Wait a minute. Personal liability?
You make think your financial advisor (who is likely what is called a 3(21) fiduciary) is bearing these responsibilities for you. However, unless you are working with a 3(38) fiduciary, you still shoulder that responsibility. This is the primary area where lawsuits occur — when employees file complaints that the funds in the plan have fees that are too high, or that they are under-performing.
The most important differences come down to risk and responsibility.
- A 3(21) Fiduciary is an advisor who makes recommendations.
- A 3(38) Fiduciary is an investment manager who acts. That means they handle the due diligence review, the selecting and monitoring of available investment options, make decisions, and ultimately take responsibility for your plan’s day-to-day management.
- Find out if your advisor is a 3(21) or 3(38) fiduciary.
- If you don’t have a 3(38) fiduciary, hire one and delegate your responsibility for managing your plan’s investments.
2. What’s it really costing you? Very few business owners have a clear idea of what they are paying for their 401(k) plan. Not surprising. The fees in a plan come from several different sources, and they are easy to bury so you can’t figure out the bottom line. It’s your fiduciary responsibility to know these fees so you can make the best choices for your employees.
Plans with insurance companies tend to be more cost-effective in the very early stages of starting your plan, but tend to be more expensive once your plan grows to $500,000. A turn-key plan that offers all services bundled together tends to be less expensive, but it’s important to know what you are paying for TPA/Recordkeeping fees, 3(38) fiduciary fees, custodial fees, advisor fees, and the expense ratios of the funds in the plan.
- Put out a request for proposal to get a comparison on how your current fees compare with other options. It’s your duty as a fiduciary of the plan to do this every 3-5 years, or to delegate this to a 3(38) fiduciary who will provide this service for you.
- What are you investing in? You might not have a deep understanding of the funds in the plan. As a result, it is likely that you have funds that include business practices that oppose your values, for example in the abortion and pornography industries and companies that prey on human addiction. It’s hard to avoid these unless you are very intentional about it. As a fellow Christian business owner, I am guessing that avoiding exposure to these is as important to you as it it to me.
I like to explain it this way: When you invest in a business you are in affect praying with your dollars for that company to do more of what they are already doing (either good or bad) and thrive, so they make a big profit and share it with you. I believe that what we invest in makes a very big difference to God (it is his money after all!) and it is possible to invest in companies and funds that promote human flourishing instead of causing the suffering and exploitation of our brothers and sisters. Screening negative business practices out of your investments is one more way to live out your faith in a practical and meaningful way.
- Have your fund investment options screened for business practices that don’t align with your values. Not sure how to do that? Visit our beaconwealth.com and select the “Screen my Funds” button to see what business practices you are invested in.
- Add faith-based investments to your fund line-up.
- Could you be keeping more of what you’ve earned? Are you paying too much in taxes? Business owners often find that could save more on their personal taxes (and therefore use that money in other more effective ways) but they are unable to contribute fully to their 401(k). In fact, they often get a refund check at the end of the year.
This is the result of poor plan design. The structure of your plan should allow you and the other owners of the business to also contribute to the plan – sometimes up to $250,000 per year – in order to most efficiently save for your own future while relieving some of your tax burden. You may need to make a small contribution to your employees’ accounts, which will result in your ability to substantially increase your personal contributions and thereby reduce your taxes.
- Schedule a review of your plan design to uncover improvements that can be made to the structure of the plan.
- Are you serving your team? As a business owner, you want to take great care of your employees. Front line employees rarely have the knowledge and skill to create their own portfolio in a given fund line-up and rely heavily on an advisor to guide them. Sadly, after the implementation of a 401(k) plan, few are served well. I typically hear business owners say they haven’t seen or heard from their advisor in months or sometimes even years.
Having a dedicated advisor to educate your employees will help them appreciate the importance of contributing to their 401(k). If your employees are not participating in the plan, they are not receiving the full benefit of the plan. Unfortunately, not only will it have a negative impact on their future, but it may hinder you from contributing as much as you’d like.
- Schedule a meeting with your current advisor to discuss a regular meeting schedule for them to meet with employees to provide ongoing investor education.
- If your advisor is not willing to provide this service, consider hiring a new advisor. You are paying to have an advisor serve your participants and you should be getting what you pay for.
It’s important to have a retirement plan that meets the criteria of the Department of Labor and the IRS, but you don’t have to go it alone. Delegating the management of your 401(k) plan will give you peace of mind that you are in compliance while serving your employees and investing in God-honoring funds and companies.
Cassandra Laymon, MBA, CFP, CPFA is a Certified Plan Fiduciary Advisor, and the President of Beacon Wealth Consultants, a 3(38) fiduciary provider through the Kingdom(k), a faith-based 401(k) plan for Christian business owners.