The Big Mistakes Small Businesses Make When Setting Up a New 401(k) Plan (and How to Avoid Them)

Offering a 401(k) plan is one of the best things you can do for your team – and for your business. It helps your employees save for retirement, shows you care about their future, and can even give you some nice tax breaks.

But starting a 401(k) plan the wrong way can lead to confusion, stress, and unnecessary costs. Many small business owners jump in without knowing the full picture, and that’s where mistakes happen.

In this post, we’ll walk you through the biggest 401(k) mistakes small businesses make—and how to avoid them with ease.

Mistake #1 – Picking the Wrong Type of 401(k) Plan

Not all 401(k) plans are created equal. Some are designed for high-growth companies, others for lean teams or solo owners. Choosing the wrong one can lead to more than just frustration; it can cost you time, money, and missed opportunities.

What Can Go Wrong:

• You unknowingly default into a plan that doesn’t fit your business structure or goals.
• You end up with a plan that’s overly complex or not cost-efficient for your team size.
• You miss out on design features that could reduce tax liability, increase participation, or boost savings potential.

Why Plan Design Matters:

Your 401(k) plan design isn’t just paperwork – it’s a strategic tool. The right setup can optimize tax advantages, align with cash flow, and support talent retention. The wrong setup? It can quietly drain resources or limit your flexibility as your business evolves.

How to Avoid It:

• Understand your options. From Traditional to Safe Harbor, Cash Balance, and Solo 401(k), each plan type has trade-offs. Knowing what’s available helps you avoid default decisions that may not serve your best interests.
• Get expert guidance. A specialized retirement plan advisor like Rachel Carter can help you evaluate your business goals, budget, and team needs – then design a plan that works smarter, not harder.

Mistake #2 – Not Having a Clear Plan for Employee Contributions

A 401(k) plan is only useful if your team understands how to use it. Many businesses set up the plan but forget to explain the rules or make it easy to join.

What Can Go Wrong:

• Employees don’t sign up because they’re confused.
• You miss out on tax credits for things like automatic enrollment.

How to Avoid It:

• Set up automatic features: Auto-enrollment and auto-increase make saving easy for employees.
• Use simple communication: Share one-pagers, videos, or meetings that explain the plan in plain language.

Mistake #3 – Ignoring Fees and Hidden Costs

A 401(k) plan isn’t free – and some plans come with hidden costs that chip away at savings over time.

What Can Go Wrong:

• You pay too much in fees without realizing it.
• Employees lose money due to high investment costs.

How to Avoid It:

• Ask questions: What are the admin fees? Are there investment fees? Advisor fees?
• Get a side-by-side comparison: Don’t just look at cost – look at value and transparency.

Mistake #4 – Not Keeping Up with Rules and Deadlines

401(k) plans have rules – lots of them. Miss a deadline, and you could face penalties or problems with the IRS or DOL.

What Can Go Wrong:

• Missing key forms (like Form 5500).
• Not following rules about who can join and when.

How to Avoid It:

• Use a compliance checklist: Keep track of important dates and tasks.
• Lean on your service providers: A good plan partner keeps you on schedule and out of trouble.

Mistake #5 – Going It Alone

Many small business owners think they can manage a 401(k) on their own. But these plans come with a lot of moving parts—investments, rules, documents, deadlines.

What Can Go Wrong:

• Overwhelm and burnout.
• Missed steps that could lead to legal trouble or lost money.

How to Avoid It:

• Work with a 401k Advisor: Someone who knows the ins and outs of retirement plans.
• Look for hands-on help: Rachel Carter doesn’t just give advice – she rolls up her sleeves to help with everything from setup to support.

Quick Recap – Avoid These 5 Common 401(k) Mistakes

• Pick the right plan design for your team size and company goals.
• Set clear, simple rules for employee contributions.
• Understand and manage all fees.
• Stay on top of deadlines and regulations.
• Don’t try to do it all by yourself – get expert help.

Avoiding these mistakes starts with the right guidance. With expert support, your 401(k) can be a powerful tool – not a source of stress.