As a business owner, providing a 401(k) plan can be a game-changer for both your company and your employees. While the benefits—such as tax advantages and talent retention—are clear, many business owners have also learned valuable lessons along the way. Understanding these lessons can help you optimize your plan and avoid common pitfalls.

Key Benefits of a 401(k) Plan for Business Owners

Before diving into the lessons learned, it’s important to acknowledge the major advantages of offering a 401(k):

• • Tax Advantages: Employer contributions are tax-deductible, and new plans may qualify for tax credits under the SECURE Act. Additionally, business owners can take advantage of the 415 limits, which sets the maximum contribution limit for a participant’s account. For 2025, the 415(c) limit is $70,000 (or $77,500 for those 50 and older, including catch-up contributions). This allows highly compensated employees, including business owners, to maximize their tax-deferred savings while staying within IRS guidelines. Check out our blog post on the Super Catch-Up 401(k) Contribution to maximize your savings in your 401(k) plan.

• • Attracting and Retaining Talent: A strong retirement plan helps you compete for top employees and reduce turnover. According to Forbes, 62% of workers consider the availability of a retirement plan when deciding whether to accept or remain in a job, and 76% are likely to be attracted to companies that care more about their financial well-being.

• • Owner Participation: Business owners can use the plan to save for their own retirement while benefiting from tax-deferred growth.

• • Flexibility: Plans can be customized with different matching structures and vesting schedules to fit your business needs.

Lessons Learned from Implementing a 401(k) Plan

While these benefits seem substantial, successful business owners have learned several key lessons when setting up and managing their plans.

1. Offer a Roth 401(k) Option for Long-Term Tax Benefits

• • Employees, especially younger ones, may benefit more from tax-free withdrawals in retirement, allowing them to build wealth more effectively over time.
    • • For Example: Alex is 22 years old, and she just started her job a toy company that offers a retirement plan. If she elects to save $4,100 per year and continues saving that amount every year until she reaches the age of 65, assuming a 7% rate of return, Alex will have accrued $1,000,000 for her retirement. She will be able to draw from this Tax-free for the rest of her life. *

*This is a hypothetical illustration and is not intended to reflect the actual performance of any particular security. Future performance cannot be guaranteed, and investment yields will fluctuate with market conditions. Actual investor results will vary

• • Unlike traditional 401(k) contributions, Roth 401(k) withdrawals in retirement are tax-free, which can be an advantage if future tax rates rise.

• • This option provides tax diversification, helping employees hedge against uncertain future tax laws.

2. Avoid Allowing 401(k) Loans

• • Allowing employees to take loans against their 401(k) accounts often leads to premature depletion of retirement savings.
    • • Loans interrupt the potential for tax-deferred compounding for younger employees. Delaying their retirement goals.

• • If an employee leaves the company, any outstanding loan balance is typically due within 60 days, creating financial stress.

• • Studies show that many employees who take loans fail to repay them, reducing their overall retirement security.
    • • Deloitte’s analysis finds that more than $2 trillion in potential future account balances will be lost due to loan defaults from 401(k) accounts over the next 10 years, potentially threatening the retirement security of millions of Americans.

3. Implement Auto-Enrollment and Auto-Escalation for 401(k) Plans

• • Auto-enrollment increases participation rates significantly, ensuring employees start saving earlier.
    • • Richard Thaler, a Nobel Laureate and Professor of Behavioral Economics at the University of Chicago created this idea that employees should be encouraged to participate in retirement plans but knew that employees would struggle to sign up for these plans if there was no nudge from the employer. Thus, he came up with the auto enrollment. Today, about 66% of plans use auto-enrollment for their employees.
    • • Auto-enrollment also helps with plan testing by increasing the participation among employees, which makes it easier for owners to contribute the maximum amount without any restrictions.

• • Research has shown that employees are more likely to stay enrolled in a plan if they are automatically added, reducing the inertia of voluntary sign-ups.
    • • While participation for opt in plans are close to 70% of employees, when a plan is automatically enrolling employees, close to 90% are actively participating in the plan.

• • Auto-escalation helps employees gradually increase their contributions over time, leading to higher overall retirement savings without immediate financial strain.

4. Use a Safe Harbor Plan to Avoid Compliance Headaches with 401(k) Plans

• • Traditional 401(k) plans require annual nondiscrimination testing, which can limit contributions for highly compensated employees.
    • • For the business owner, the primary advantage of Safe Harbor 401(k) plans is the ability to avoid plan testing which allows highly compensated employees to save the most money possible within the plan. A business owner could save $70,000 in 2025 and the Safe Harbor match avoids most plan testing to ensure that their contributions do not get returned.

• • Safe harbor plans automatically satisfy these testing requirements, allowing business owners and top employees to contribute the maximum amount without restrictions.

5. Provide Regular 401(k) Employee Education

• • Many employees lack financial literacy and don’t fully understand how to maximize their 401(k) benefits.

• • Regular workshops, webinars, and one-on-one financial counseling can increase engagement and contribution rates.
    • • For the 401(k) Plans we manage here at Fontana Financial Planning, we have a yearly in-person meeting with the employees of the 401(k) plans illustrating how great of a boss they have by educating them on things such as the 401(k) match, the safe harbor plan, and the importance of a Roth 401(k).

• • Employees who are educated about investing tend to make better asset allocation choices, improving long-term retirement outcomes.

Conclusion

Offering a 401(k) plan is a smart move for business owners, but there are lessons to be learned along the way. By incorporating strategies such as a Roth option, safe harbor plans, auto-enrollment, and controlled fees, you can build a retirement plan those benefits both your employees and your business. Learning from others’ experiences ensures that your 401(k) plan is not just a compliance requirement but an asset to your company’s success.

Any opinions are those of Fontana Financial Planning and not necessarily those of Raymond James. Expressions of opinion are as of this date and are subject to change without notice. Raymond James and its advisors do not offer tax or legal advice. You should discuss any tax or legal matters with the appropriate professional. Investing involves risk and you may incur a profit or loss regardless of strategy selected, including diversification and asset allocation. Prior to making an investment decision, please consult with your financial advisor about your individual situation.

401(k) plans are long-term retirement savings vehicles. Withdrawal of pre-tax contributions and/or earnings will be subject to ordinary income tax and, if taken prior to age 59 1/2, may be subject to a 10% federal tax penalty.

Roth 401(k) plans are long-term retirement savings vehicles. Contributions to a Roth 401(k) are never tax deductible, but if certain conditions are met, distributions will be completely income tax free. Unlike Roth IRAs, Roth 401(k) participants are subject to required minimum distributions at age 72 (70 ½ if you reach 70 ½ before January 1, 2020). Matching contributions from your employer may be subject to a vesting schedule. Please consult with your financial advisor for more information. You should discuss any tax or legal matters with the appropriate professional.