End of Year 401(k) Tips for Private Practice Owners

DECEMBER 17, 2018
Roger Lee, CEO and Co-founder, Human Interest
The end of the year is an excellent time to do a check-up on the health of your practice’s 401(k) plan. This may feel like a daunting process if you don’t have a dedicated staff. But with today’s modern and automated options for 401(k)s​, this does not have to be an issue.

Here are four steps to take by the end of the year that help you rest easy knowing your 401(k) is working hard for you and your employees.

Benchmark your plan

When re-evaluating your current plan, ask yourself the following questions:
 

Do you want to change your plan design?

This covers the basics of how your plan is structured. You should also consider if you want to change your plan to Safe Harbor, offer a post-tax (Roth) option, establish or increase an employer match, etc.? Ask your 401(k) provider for more information on all of the various options and costs to help you decide whether these are worthwhile changes for the upcoming year.

Do you want to keep the same provider?

Several financial institutions provide 401(k) plans, and not all are the same. If you’ve had a good experience with your provider over the last year, it may be worth holding onto them for another year. But if you have found the relationship frustrating, or your provider doesn’t offer all the features you want for your plan, it may be worth shopping around for another one.

How are the funds you offer? Are they too expensive?

Even if you’re happy with your 401(k) provider, your plan with them might not have a wide selection of fund options in which your employees can invest. You don’t necessarily need to switch providers to get more available funds since providers often offer different plan levels.
Ideally, the plan should allow you to offer index funds, since they generally have lower expense ratios and tend to deliver higher returns over time. A good baseline is 0.25%, so try to see if you can offer at least a few funds under this threshold.

How much are you paying for the plan as an employer?

401(k) plans cost money, and the employer bears the majority of those costs. It’s a good idea to ask your provider for a full fee disclosure, review the charges, and shop around a little to make sure you’re not missing out on more savings. That’s especially the case if you’ve had the same plan for years. Keep in mind that in recent years ​technology has driven down expenses ​for many 401(k) providers by allowing them to automate plan administration, sync to online payroll systems, and offer automated investment advising, reducing the costs of a traditionally paper-heavy and hands-on approach. This allows providers to then pass these savings on to businesses, while also reducing a lot of the tedious administrative work, making 401(k) planning easier and more approachable for private practice owners.

Review your participation rates

A 401(k) can be a great employee benefit, but it doesn’t provide as much value when employees opt out. Take a look at how many of your eligible employees are participating in the plan and consider ways you can increase that rate.

Here are some tips for encouraging more employees to use the plan:
  • Ensure that the plan meets your employees’ needs and be clear about the plan’s benefits.
  • Shorten or eliminate the waiting period for new employees to enter the plan.
  • Offer a matching contribution (or a higher one if you already provide one).
  • Shorten or eliminate the vesting schedule for matching contributions.
  • Consider automatic enrollment when employees start the job.

Prepare for non-discrimination testing

A 401(k) plan is designed to benefit all of your eligible employees, not just the owners or highly-compensated employees. If your plan is found to not meet certain benchmarks set by the IRS, you may have to retroactively refund certain employees or deal with additional paperwork after this annual testing is performed.

The process is done at the end of the year, so it’s important to check now to make sure your plan will pass the ​non-discrimination tests. ​ Or, you can choose a provider that monitors your account and helps set up a plan that won’t fail in the first place. Alternatively, you can opt in for a plan such as ​Safe Harbor, which is a tax-deductible 401(k) plan that helps small companies pass certain IRS compliance testing automatically.

Offer some tips to your employees

Another service you can provide your employees with is to help them make sure they’re using the plan wisely. And if you personally use the 401(k) plan, these tips can help you too.
 

Check your contribution rate

In 2018, the annual contribution limit is $18,500. I​n 2019, ​ that limit will increase to $19,000. If you’re over 50, you can contribute an additional $6,000 in catch-up contributions each year.

If you contribute too much, you may be taxed twice on the overage amount. The good news is that you have until the income tax deadline (typically April 15) to get the excess contributions returned to you.

Review your asset allocation

Different plan funds have different mixes of stocks, bonds, and other assets. Check your plan to ensure you have the right mix of risky and safe investments based on how long you have until retirement and your risk tolerance. Or check with your provider to see if this is a service they provide.

Check fund expense ratios

Each fund has an annual fee called an expense ratio. This fee covers the expenses of the fund and is typically a percentage of your investment in the fund. If your provider offers similar funds with different fees, it may be worth comparing them and reallocating your funds to the less expensive ones.

Rebalance your portfolio

As your investments fluctuate over time, it could throw off your overall asset allocation. As such, it’s important to rebalance your portfolio at least once a year to make sure you’re still on track to reach your retirement goals. Some modern 401(k) plans provide automatic rebalancing, but if yours doesn’t you’ll need to do it on your own.

Bottom line, as an employer it’s important to have a 401(k) plan that meets your employees’ needs. Doing so can make for a happier workforce and better retention. As you review your current plan, compare what it offers with these features to determine if you have the right plan for your business.

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About Roger Lee:
Roger Lee is the CEO and Co-founder of Human Interest. Based in San Francisco, Human Interest helps small businesses all over the country offer 401(k)s to their employees. Roger and his team focus on increasing 401(k) access through a high-quality, affordable solution that lowers the administrative burden for businesses and prioritizes employee experience and education. He was formerly a co-founder at Thunder and has a degree in Applied Mathematics from Harvard University.

About Human Interest:
Human Interest is an online 401(k) provider that helps companies offer modern, paperless 401(k) plans. Human Interest enables all businesses to provide a customizable, scalable, and approachable 401(k) that is easy to manage for both employers and employees as the company grows. With Human Interest, employers can set up and administer a 401(k) plan entirely online, and can offer built-in investment advising to their employees (via Human Interest Advisors, LLC) to help them make better financial decisions. Our online solution makes it possible for companies to offer high-quality 401(k)s as a part of a competitive benefits package without putting a huge administrative burden on HR teams or employers. Human Interest investors include Paul Buchheit (creator of Gmail), Joe Montana (Hall of Fame quarterback), Jacob Gibson (co-founder of Nerdwallet), and Adam Nash, former CEO of Wealthfront. You can find Human Interest on twitter, facebook, and linkedin!  

 

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