With over 25 years of experience advising on 401(k) plans, I’ve seen firsthand how a well-structured retirement plan can be a game-changer for businesses. For CPAs looking to expand their advisory role, understanding workplace retirement plan options is crucial to offering tailored, value-added recommendations that align with a client’s goals and needs. As SECURE 2.0 introduces new opportunities and challenges for small business owners, now is an opportune time for CPAs to enhance their services by focusing on 401(k) plan optimization.
In today’s competitive business environment, a 401(k) plan isn’t just another line item on an expense report—it can be a powerful tool for building tax-deferred wealth and improving employee recruitment and retention. Optimizing a retirement plan doesn’t mean choosing between cost savings and competitive benefits; with the right strategies, a 401(k) plan can become a cornerstone for motivating a loyal and productive workforce. Here’s how CPAs can guide clients toward a balanced, effective 401(k) design that benefits business owners, employees, and the bottom line.
By leveraging tax-friendly strategies, business owners can reduce their tax liability, effectively boosting profits without increasing sales or cutting costs. Below are several key strategies that can help enhance financial health, reduce taxes, and support retirement savings.
Max-Out 401(k) Contributions
Maximizing contributions to a 401(k) account can significantly reduce taxable income. Business owners not fully utilizing their 401(k) plans each year miss out on substantial tax advantages. Contribution limits are adjusted annually by the IRS, including additional “catch-up” contributions for those aged 50 and over, offering even more opportunities for tax savings.
A Cash Balance Plan, a type of defined benefit retirement plan, allows business owners to contribute substantially more each year than a 401(k) or profit-sharing plan. This strategy can be particularly advantageous for high-income earners looking to accelerate their retirement savings while enjoying significant tax benefits.
BOOSTING PARTICIPATION WITH AUTO-ENROLLMENT AND AUTO-ESCALATION
Auto-enrollment and auto-escalation features can significantly increase retirement plan participation and savings rates. Studies show auto-enrollment can increase plan participation by 85%, and auto-escalation can boost savings rates by at least 1% of salary per year until a 10-15% cap is reached. Beginning January 1, 2025, all new plans will be required to include these features. For plans that don’t currently offer auto-enrollment, an employer tax credit of $500 is available for the first three years. Increasing the initial default deferral rate can also improve retirement readiness and encourage on-time retirements.
Statistics on 401(k) Plan Design - Did You Know?...
THE POWER OF BENCHMARKING
Benchmarking—regularly comparing a retirement plan to industry peers—is more than just a fiduciary responsibility; it’s a best practice that ensures plan fees are competitive and in line with industry standards. Effective benchmarking involves evaluating plan fees, investment options, costs, and service providers. A well-benchmarked plan can:
Beyond Employer Matching: Alternative Incentive Contributions
While employer matching is a popular incentive, other alternatives like granting company equity or offering profit sharing can provide flexibility. These strategies allow businesses to adjust contributions based on performance and economic conditions, offering another way to incentivize employees.
Embracing Effective Strategies
An effective 401(k) plan design strategy can help businesses control costs while providing a competitive retirement benefit. Now is an excellent time for CPAs to encourage clients to review their current 401(k) plans, with a focus on flexibility, cost-efficiency, and maximizing both employer and employee benefits.
Want to learn more about 401(k) plans and other workplace retirement strategies?
Looking for ways to expand advisory services in your CPA practice? Learn how to integrate tax strategies with retirement planning and fiduciary guidance for your small business clients.
Victor Hicks II, CFP®, AIF® is a Wealth Advisor and Managing Director at Perigon Wealth Management.
Since 1995, Victor has specialized in workplace retirement plans for small business. He has advised clients on issues related to plan design, employee education, investments, and fiduciary compliance.
Contact him directly at: Victor.Hicks@PerigonWealth.com | 248.936.9380
PERIGON WEALTH MANAGEMENT LLC, 2000 Town Center, Ste. 1825, Southfield, MI 48075
IMPORTANT: Perigon Wealth Management, LLC (“Perigon”) is a Registered Investment Advisor (“RIA”), located in the State of California. Perigon provides investment advisory and related services for clients nationally. Perigon will maintain all applicable registration and licenses as required by the various states in which Perigon conducts business, as applicable. Perigon renders individualized responses to persons in a particular state only after complying with all regulatory requirements, or pursuant to an applicable state exemption or exclusion This information was developed as a general guide to educate plan sponsors and is not intended as authoritative guidance or tax/legal advice. Each plan has unique requirements, and you should consult your attorney or tax advisor for guidance on your specific situation.
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