5 Key Steps to Setting Up 401k Plan for Small Business Employees

Choosing the right 401(k) plan type is critical. A wrong choice could cost you thousands of dollars in unnecessary contributions or hours. 401(k) plans can be a powerful tool to attract and retain employees. However, they come with a responsibility to comply with government regulations. This includes annual testing and reporting to the IRS.

Set a Budget

Providing retirement benefits to your employees is a great way to attract and retain top talent. The question is, how to set up a 401k plan for small business employee? Setting up and managing a 401k plan can be costly for small businesses. Fortunately, there are several ways for small businesses to offset setup and administrative costs. One option is to partner with a professional employer organization (PEO), which provides thousands of small businesses nationwide with human resources, payroll, and benefits services. Another option is to choose a 401(k) provider that offers low-cost funds and well-researched investment strategies. These funds can reduce your fees and help your employees build more giant nest eggs. Finally, you can also contribute to match employee contributions. These contributions act like a bonus, boosting your team’s retirement savings while increasing morale and motivation.

Select a 401k Provider

As with most things in business, not all 401(k) providers are created equal. There can be considerable differences in fees, investment options, ease of use, and startup costs. To ensure that your small business offers the most competitive and well-rounded 401(k) plan possible, it’s essential to carefully review companies and make a selection based on your own unique needs. For example, if your budget is tight but you still want to offer the ability for employees to invest in tax-advantaged retirement accounts, a SEP-IRA might be a better fit than a traditional 401(k). Then again, if your profits are high and you’re ready to kick-start employee savings, a standard profit-sharing 401(k) may be more suitable. In addition to the specific plans you select, a good provider will keep your company compliant and handle all recordkeeping. This can burden small businesses, so many works with a service providing all-in-one support. This way, you can avoid the hassle of managing various vendors and keep your focus on growing your business.

Decide on a Plan Design

Small businesses can set up their 401k plan in a few different ways. Some are more expensive than others to maintain and set up, but all can help employees save for retirement. A traditional profit-sharing 401(k) allows employers to contribute outright to employee accounts or match salary deferrals. It also allows the employer to choose a vesting schedule, which can incentivize long-term employment or limit highly compensated employees (HCEs) to a certain percentage of the total plan. However, this type of plan must comply with IRS nondiscrimination testing. Another way to set up a 401(k) is to use a safe harbor 401(k) plan, which lets HCEs contribute more annually without passing the nondiscrimination testing. These plans can be more expensive to administer because of the required annual paperwork and reporting.

Set Up Automatic Enrollment

Once you’ve figured out the type of 401(k) plan you want to set up and the plan design, it’s time to start thinking about how you will get employees involved. Many 401(k) providers offer auto-enrollment, meaning all new hires will be automatically enrolled in the plan unless they opt out of it. This can be a great way to help encourage employees to save for retirement by giving them that extra little nudge. It’s also an essential part of the overall package that you can use to attract and retain top talent. However, it’s important to remember that the employer has a fiduciary duty to its employees and must maintain accurate records for the plan. This includes consistently updating the participants on plan changes, investments, and associated fees. It may be more efficient for small business owners to work with a recordkeeping provider that will handle this for them. This will usually cost a few hundred dollars upfront to get things started and charges per participant.

Choose Your 401k Trustee

When the plan sponsor establishes a 401(k), it must designate a Trustee to manage and account for the assets in the plan. This can be an employee of the company, a professional trust company, or a group of individuals who agree to assume the duties of the Trustee without compensation. Professional Trustees will charge a fee for their services. The Trustee, together with the Investment Fiduciary (which may be a separate person or entity), is responsible for interviewing, selecting, and monitoring the performance of plan service providers to ensure they are performing their duties at a reasonable cost. This is the highest level of responsibility in the fiduciary hierarchy, and a failure to perform can result in substantial liability for the trustees. A good Trustee can help a business avoid litigation and meet its responsibilities. They should be able to explain the benefits of a retirement plan to employees in plain language and be willing to answer questions.