401K plans have been the benchmark of most retirement plans for close to three decades. 401k plans usually come with the benefit package that is required by law for most employers to provide to their employees. The plans are important to provide a nest egg or financial safety net for when an individual decides to retire. While 401K plans are extremely helpful and beneficial – mainly due to the fact that the money has a high annual minimum deposit and is tax deferred – there are still some fundamental risks and cracks in the system that need to be fixed and addressed to allow for the program to work more efficiently. Moreover, it can be extremely expensive for companies to offer their employees a 401k plan. In addition, navigating the compliance laws provide by the banks, IRS, and SEC can be extremely complicated. Here are some of the 5 common problems with employee 401K plans.
- For one, there can be a lot of people involved in the plan, from sponsors, company managers and accountants. If any one of those persons or organizations makes a change or adjustment to the plan and another person in charge of overseeing or making amendments to the plan doesn’t know that there has been a change, it can negatively affect the terms and conditions of the overall plan. B401K plans are complicated and because it usually takes a lot of people to monitor and manage them, it is important to have checks and balances to make sure everyone is on the same page so that it doesn’t affect the 401K poorly.
- Another problem is that compliance laws change all the time and the IRS requires that the 401K plan manager or sponsor make the necessary updates before a strict deadline, or else the plan can lose its tax deferred qualification. They can be minor changes or big changes, but because the IRS laws and bylaws are always changing, and if your plan sponsor or manager is not paying close enough attention, you can lose a large portion of your nest egg due to heavy taxes or penalties.
- 401K plans are also subject to the complicated laws as written under the Employee Retirement Income Security Act (ERISA). If a business does not properly report the compensation of an employee on their 401K plan it can possibly affect how much total capital is allocated. In the short run this might not be noticeable, but any slight fluctuation can cost you a lot of money in the long run.
- Unless you take the Tim Sykes challenge and somehow become a millionaire, your only chances of retiring and not having to work to your last day might come down to a properly managed or sponsored 401k plan. Due to mismanagement, many 401k plans are subject to huge losses.
- Lastly, if your employer or 401k plan manager improperly states the amount of matched contributions, you could lose many of the benefits on your plan as provided by the IRS. It is recommended that you look at your pay stubs to make sure the correct percentage is marked down and that the correct amount is being allocated to your plan, so that you can rest easy about your financial future.