By Matt Sumnicht, CPFA®, CEPA®,

When you think about your business, you probably don’t visualize a profit and loss statement. You see the people who built it with you. The crew that shows up at 6 a.m. The office manager who’s been there since year one. The technician you trained who’s training someone else now.

A 401(k) plan is supposed to be one of the ways you take care of them. But it’s easy to think of it as another line item, an HR thing that runs on autopilot somewhere between payroll and the office coffee machine.

The owners we see doing this well think about it differently. They’ve come to see the 401(k) plan as a business asset that helps with hiring, retention, their own eventual retirement and a category of personal liability owners might not realize they’re carrying.

So, does your 401(k) plan fit the bill?

Keep reading for a walkthrough of what “healthy” actually means, why it matters and how to tell whether the plan you already have is doing the job you think it’s doing.

Key Takeaways

  • A healthy 401(k) plan can be judged across four key areas: plan design, investment lineup, participant outcomes and fiduciary governance.
  • A 401(k) plan can meaningfully reduce turnover costs, and SECURE Act 2.0 tax credits cover up to $5,000 per year for the first three years of a new plan.
  • When employees can’t afford to retire on time, it can cost employers in salary, benefits and a backed-up promotion pipeline.
  • Owners who sponsor a 401(k) plan become fiduciaries under ERISA and carry personal liability for plan decisions.
  • A 3(38) fiduciary advisor can take on day-to-day investment responsibility and the liability that comes with it.

Why a Healthy 401(k) Plan Matters to Your Business

You’ve probably said this out loud at least once: It’s hard to find good people. Even harder to keep them. A 401(k) plan won’t solve hiring on its own, but it’s one of the more underrated tools a small business has to attract, retain and eventually move people through the workforce cleanly.

It helps you hire and keep people. Just consider a Pew survey found 89% of small employers who offered a retirement plan said it helped them hire and retain workers. By saving top talent, you’re also likely saving money. Gusto, a payroll and employee benefits platform, found that offering a 401(k) plan can save a small business more than $100,000 a year in reduced turnover costs.

The tax math is friendlier than many owners realize. The SECURE Act 2.0 increased tax credits available to small businesses starting a 401(k) plan to $5,000 per year for the first three years, covering up to 50% of setup expenses. There’s an additional credit for adding auto-enrollment, one of the highest-impact features in the plan playbook. If that’s not enough, employer contributions are generally tax-deductible and aren’t subject to Social Security, Medicare or other payroll taxes.

It keeps the workforce moving. Companies need workforce mobility, with employees ready to retire on their own terms and others ready to step into their roles. When employees feel financially uncertain about retirement, they may stay longer than they’d choose to. This could prevent the people behind them from moving up. According to Prudential, each year an employee delays retirement because they can’t afford to stop can cost an employer more than $50,000 in higher salary and benefit costs compared to a new hire.

The argument here isn’t that long-tenured employees are a cost to manage. Many of them are exactly the people you want to stay. The argument is about choice. A healthy plan is what makes that choice possible.

It builds your own retirement, too. In many plans we work with, the largest account balance belongs to the owner. The plan you designed for everyone else is the plan you’re personally going to retire on.

And it protects you from a risk you may not realize you have. When you sponsor a 401(k) plan, you and any other designated officials become fiduciaries under ERISA. That carries personal liability. If the plan is found to have charged unreasonable fees, used inappropriate investments or failed to follow its own policies, the people who oversaw it can be held personally responsible.

The risk isn’t that owners run their plans recklessly. It’s that they can’t prove they ran them prudently, because they don’t have the documentation and process to show it.

What Does a Healthy 401(k) Plan Look Like and How Can You Tell If Yours Is One?

There’s no single number that tells you whether a 401(k) plan is healthy. The same way you’d evaluate your business, a plan is judged on the numbers and the intangibles together.

But across how the Department of Labor talks about plan sponsor responsibilities, how the industry benchmarks plans and how we evaluate plans for our own clients, four areas consistently matter most.

Plan design, or the rules of the road. Who’s eligible, how the match works, when employees vest, whether the plan auto-enrolls new hires, whether it auto-escalates their contributions. These are exactly the features prospective hires compare when they’re weighing two job offers. The best plans get reviewed every few years against what the business actually needs now.

It’s why Bowline runs industry-specific benchmarking reports for the owners we work with, showing how plans at companies like theirs are structured and why. The reports often surface design gaps owners didn’t realize they had.

Worth asking: When was your plan design last reviewed? Is your plan competitive with what other employers in your industry offer? Does it have auto-enrollment? A Vanguard report found that plans with automatic enrollment have a 94% participation rate, compared with 64% for voluntary enrollment. That’s essentially the same plan reaching half as many employees by changing one default.

Investment lineup, which is the menu of funds employees can choose from. Healthy lineups are often small (typically a dozen or so options), built around low-cost share classes, and anchored by a thoughtful default for the participants who don’t make active choices. Unhealthy lineups are bloated, expensive and full of funds nobody can explain.

Worth asking: When was your investment lineup last reviewed by someone whose only job was to look at it?

Participant outcomes. These are the actual numbers, like participation rate, average deferral rate and account balances by age. A plan can be technically compliant and still be failing the people inside it.

Worth asking: What percentage of your eligible employees actually participate? Of those, what are they deferring?

Fiduciary governance – all the paperwork and process stuff. Think: Meeting minutes, investment policy statement, vendor benchmarking, fee disclosure review. Yes, this is the boring part. It’s also the part that protects you personally if anything goes wrong.

Worth asking: Is there a written investment policy statement? When was the plan’s fee structure last benchmarked against the market?

A plan strong on three of these and weak on the fourth isn’t healthy. They work together. If you can confidently answer most of the questions above, your plan is likely in good shape. If most of the answers are “I’m not sure,” it’s worth getting fresh eyes on it.

Is the Person Running Your 401(k) Right for Your Company’s Needs?

Of course, the health of your 401(k) plan doesn’t take care of itself. Someone is running your 401(k) plan day-to-day, and the kind of person they are matters more than most owners realize.

There are two main types of professionals who work with 401(k) plans, and they’re not interchangeable.

The first type is a broker. Brokers typically set up the plan with a recordkeeper, select the initial investment lineup and collect a commission on the assets. There’s nothing inherently wrong with that on its face. Many plans were placed this way and run fine for years. But brokers usually aren’t fiduciaries, which means they aren’t legally bound to put the plan’s interests (i.e., yours) ahead of their own. Their relationship is generally with the owner, and the level of ongoing involvement varies widely.

The second type is a fiduciary advisor. Fiduciary advisors operate under a higher legal standard, charge transparent fees rather than commissions and take on a defined role in the plan’s governance. Depending on how they’re engaged, they can also take on some or all of the legal responsibility for investment decisions, which would otherwise sit with the owner personally.

Within the fiduciary category, there are two specific roles defined by ERISA: 3(21) and 3(38). The difference between them comes down to how much authority and how much liability the advisor takes on.

Here’s a simple breakdown:

*Hiring a 3(38) fiduciary shifts most investment-related liability to the advisor, but ERISA still requires the plan sponsor to prudently select and monitor the 3(38) manager. It reduces, but does not eliminate, fiduciary liability.

For an owner who didn’t realize they were a fiduciary in the first place, the ability to delegate that risk to a credentialed specialist is meaningful. A 3(38) advisor takes on the bulk of the day-to-day investment liability that would otherwise be the owner’s personally.

Whichever type of advisor you have, the work should be continuous rather than annual: reviewing the investment lineup quarterly, benchmarking fees, meeting with the sponsor to review participant outcomes, providing education for employees and documenting the meaningful decisions in the plan’s record.

How Bowline Financial Approaches 401(k) Plans

We work with business owners who think of their 401(k) plan as part of running a real business,  not as a compliance box to check.

Our default approach is to serve as full-capacity 3(38) fiduciaries. Other advisors often charge separately for that service; we usually don’t. We stay independent – no commissions, no proprietary products, no hidden revenue-sharing with funds – and we’re product- and recordkeeper-agnostic. Whoever you currently use, we either work with them already or are happy to.

What sets the way we work apart is harder to put in a brochure. Many advisors who handle 401(k) plans treat the relationship as one with the owner. They review fees and funds once a year, then call it a day.

But that’s only half the job. The other half is sitting with the actual employees, who in many cases have never had access to a financial advisor before. We think it’s an equally important part of the work.

This approach can work particularly well at companies in skilled trades and manufacturing. HVAC businesses, for one example. The employees are smart in what they do, they’re disciplined savers and they appreciate having real help.

Frequently Asked Questions About Managing a 401(k) Plan as a Business Owner

How much does it cost to set up a 401(k) plan for a small business? Setup costs vary by provider and plan complexity, but SECURE Act tax credits can cover up to $5,000 per year for the first three years, covering up to 50% of setup expenses. For many small businesses, the net cost in the early years is far lower than they expect.

How many employees do you need to start a 401(k) plan? There’s no minimum employee count. Even a solo business owner can open a 401(k) (often called a Solo 401(k)). Plans for businesses with employees are available at virtually every size, including plans designed specifically for small employers.

Do I have to match employee 401(k) contributions? No. Employer matching isn’t required in a traditional 401(k) plan. Many small businesses offer some level of match because it improves participation and retention, but it’s a design choice, not a legal requirement. (Certain plan types, like SIMPLE and safe harbor 401(k)s, do require employer contributions.)

Is a 401(k) plan worth it for a small business? Often yes, when you account for the full picture. Research from Gusto found that offering a 401(k) plan can save a small business more than $100,000 a year in reduced turnover costs. Combined with SECURE Act tax credits and the workforce-mobility benefits of helping employees retire on time, the math typically works in the business’s favor.

What’s the difference between a 3(21) and a 3(38) fiduciary? A 3(21) fiduciary advises the plan sponsor on investments, but the sponsor retains final authority and the liability that comes with it. A 3(38) fiduciary has the authority to make and execute investment decisions directly, which transfers most of the day-to-day fiduciary liability from the owner to the advisor.

How do I know if my 401(k) plan is “good”? A good 401(k) plan performs well across four areas: plan design, investment lineup, participant outcomes and fiduciary governance. That means it uses modern features like auto-enrollment and auto-escalation, offers a focused menu of low-cost investments, achieves strong participation and savings rates, and maintains documented decisions and regular fee benchmarking. To evaluate your own plan, ask when it was last reviewed, what percentage of employees participate, whether there’s a written investment policy statement and when the fees were last benchmarked.

Ready to Review the Health of Your 401(k) Plan?

If reading this surfaced some uncertainty about whether your plan is doing the job you think it’s doing, that’s worth paying attention to. The next step doesn’t have to be big – a 30-minute conversation, where someone whose only job is to look at the plan tells you what they see, is usually all it takes to find out where you actually stand.

We’re based in Grosse Pointe Woods and work with business owners across Metro Detroit and across the U.S. Schedule a no-pressure plan review with us. We’ll show you what we see, what’s working and where there’s room to make your plan work harder for your business.

Matt Sumnicht is a managing partner at Bowline Financial, where he advises business owners on retirement plans, exit planning, executive deferred compensation and all the financial decisions that connect them. He brings more than 20 years of experience working with closely held businesses and holds the Certified Plan Fiduciary Advisor (CPFA®) and Certified Exit Planning Advisor (CEPA®) designations.