Planning for retirement while helping your employees
Your employees love the 401(k) plan because it gives them an opportunity to achieve their retirement dreams. As a business owner, that makes you feel good. Of course, you have the same opportunity. The key is to take full advantage of your plan.
The strategies that help your employees maximize their retirement benefits also apply to you.
It may be years or it may be decades, but one day you’ll be ready to retire. When that day comes, you’ll be glad you decided to leverage your retirement plan. It’s a great resource for your future, and even more so if you use it wisely. So, what are the most important steps you can take to maximize the plan personally?
Depending on how much other employees save, you might have the opportunity to increase your own savings in the plan.
It’s true there are limits on how much you, as a business owner, can save in your company’s traditional 401(k) plan. For most people in 2017, the limit is $18,000, plus an additional $6,000 for those age 50 and over. But as an owner, the amount you can contribute is dependent on how much your employees contribute. If they save very little, your ability to contribute is lower. Encouraging all employees to save more will benefit everyone throughout the length of the plan.
Figuring out how much you can save in the plan each year may be challenging, because it is based on the amount others are saving in the plan. Annual tests are required to ensure your savings rate isn't outpacing the rate of your employees’ savings. If you find you are unable to save as much as you would like, there are some strategies that may help:
- Use a safe harbor plan. This structure allows you to avoid the annual testing requirements by setting certain requirements for contributions by the company.
- Improve plan participation. Because your own contributions are based on the rate of saving and participation of employees, you can improve your own savings by improving everyone else’s. Better plan education may lead to stronger participation and savings rates. Communicate regularly about the benefits of the plan and make the communications relevant to different employees. Remember that someone who is just starting out in their career sees things differently than someone who is nearing retirement. Therefore, different messages may appeal to different age groups. A 401(k) adviser with an emphasis on service should be able to help with this.
- If you find you’re still not able to put away enough money in the plan, investigate other retirement savings strategies, like IRAs or a defined benefit plan.
This is an important factor in the success of the plan as a whole, and for each individual participating—including you.
Fees can vary widely from one provider to another, and you should understand why for at least two reasons: You have a fiduciary responsibility to make sure you’re not overpaying, and employee accounts (including yours!) are impacted by them.
A study by NerdWallet found that just a 1% fee over a period of 40 years could ultimately make a difference of more than $500,000 to a saver.
How much impact can fees have on your retirement savings? A study by NerdWallet found that just a 1% fee over a period of 40 years could ultimately make a difference of more than $500,000 to a saver.1 Because of this potential impact on everyone’s ability to retire, it’s important to review the value and service you are receiving for the fees you are paying at least once each year.
When managing your 401(k) plan, select investments based on the big picture, not emotion.
When selecting investments, people often fall back on the notion of risk tolerance—something that changes over time. For example, if the market is up, people tend to feel more optimistic and invest in stocks with more risk. On the other hand, when the market is down, people tend to get nervous and shift away from stocks toward cash and bonds. The trouble with this approach is that it is based on yesterday, causing people to change their investments at the wrong time.
Goals-based investing prioritizes long-term goals in your investment strategy, not short-term, emotion-based decision making.
Overseeing your company’s retirement plan requires a thoughtful, strategic approach. Work with your 401(k) provider to ensure you are getting the most out of your plan to help both you and your employees set in motion their future security. Making the right choices today result in better prospects for all participants—including you.