A business owner once told me something that stuck with me.
We were reviewing his company’s retirement plan, one he had had in place for more than a decade, when he said:
“Honestly, if this 401(k) disappeared tomorrow, it probably wouldn’t change my net worth or my tax bill very much.”
His business was successful. It had grown, evolved, and become more profitable over time.
But his retirement plan had largely stayed the same.
That raises an important question for business owners:
Has your retirement plan evolved along with your business?
A Plan Can Still Work and Need a Review
Most business owners have plenty competing for their attention: employees, equipment, expansion, cash flow, taxes, and the day-to-day demands of running a company.
Once a retirement plan is established, it can be easy to leave the basic structure in place for years.
Nothing may be wrong with the plan.
But as profitability, headcount, ownership, and long-term goals change, it may be worth reviewing whether the plan is still aligned with the business as it operates today.
One way to think about that review is through three levels.
Level 1: Provide the Benefit
At the first level, the goal is straightforward:
Provide employees with a competitive retirement benefit while giving owners an opportunity to save for retirement.
For many companies, this is an appropriate starting point.
The question is whether the plan should remain at this level as the business changes.
Level 2: Optimize the Opportunity
As a business grows, retirement plan design may become more strategic.
Depending on the company’s specific circumstances, a plan review may identify opportunities to:
Evaluate contribution levels for owners and employees
Review plan design for potential tax efficiencies
Align employer contributions with business objectives
Review eligibility and plan features
Encourage employee participation and engagement
Coordinate retirement planning with broader financial goals
The appropriate design depends on factors such as ownership, compensation, employee demographics, profitability, and plan objectives.
Level 3: Build Retirement Assets Outside the Business
Many successful business owners have a significant portion of their personal net worth tied to their company.
As retirement or an eventual transition approaches, building assets outside the business may become increasingly important.
For some companies, advanced retirement plan designs may provide additional opportunities for tax-advantaged retirement contributions, subject to applicable plan limits, testing requirements, and individual circumstances.
The objective is not simply to contribute more.
It is to determine whether the retirement plan can play a larger role in helping owners prepare for their long-term financial goals.
Three Areas Worth Reviewing
When evaluating a retirement plan, three areas may deserve particular attention.
1. Funding
How much are owners and employees currently contributing toward retirement?
As the company changes, it may be appropriate to review whether contribution opportunities still align with the business’s financial position and retirement objectives.
2. Tax Considerations
Qualified retirement plans can offer tax advantages, but the impact varies based on plan design and each business owner’s specific circumstances.
A review can help determine whether the current structure remains aligned with the company’s broader tax and financial planning goals.
Business owners should consult their tax and legal professionals regarding their individual circumstances.
3. Assets Outside the Business
For owners whose personal wealth is heavily concentrated in the company, retirement assets outside the business can provide additional diversification of their overall financial picture.
A retirement plan review can help determine whether the current strategy remains appropriate as the owner moves closer to retirement or a potential business transition.
Why Plans May Stay the Same for Too Long
There is rarely a single moment when a retirement plan suddenly becomes outdated.
Instead, the business changes gradually.
Profits may increase. Employees are added. Ownership changes. Retirement gets closer.
Meanwhile, the retirement plan may continue operating under a structure established years earlier.
That does not necessarily mean the existing plan is inappropriate.
It does mean that periodically asking whether the business has outgrown its current retirement plan strategy can be worthwhile.
Is Your Plan Designed for the Business You Have Today?
The better question may not be:
“Do we have a good 401(k)?”
Instead, ask:
“Is our retirement plan still designed for where our business is today and where we want to go next?”
The answer depends on many factors, including profitability, payroll, employee demographics, ownership structure, retirement goals, and timing.
Sometimes a review confirms that the current design continues to make sense.
Other times, it may identify opportunities worth exploring.
Either way, the first step is understanding where the plan stands today.
What level is your 401(k) operating at?
Content in this material is for general information only and not intended to provide specific advice or recommendations for any individual.
Retirement plan design and tax treatment depend on individual circumstances. Consult your tax and legal professionals regarding your specific situation.
Securities offered through LPL Financial, Member FINRA/SIPC. Investment advice offered through Diversified Financial Advisors, LLC, a registered investment adviser and a separate entity from LPL Financial.