401(k) Setup for Small Business: A Brief Guide
Employer retirement plans are critical in helping workers save up for their golden years. Instead of offering pension plans that provide fixed monthly income to retirees, many companies have switched to defined-contribution plans like 401(k) plans, which require employees to invest their own wages and make important decisions about their investments.
401(k) plans offer tax benefits and flexibility in both the structure of the plan and investments that employees can make. Unlike a pension plan, workers participating in a 401(k) also retain their benefits when they leave an organization and are insured in case the company goes bankrupt.
What is a 401(k) plan?
A 401(k) plan is a relatively simple and effective way for your company to help meet your employees’ retirement needs.
Employers can receive tax benefits for matching employee contributions. Matching also provides a good incentive for employees to participate in the plan. Workers are also more likely to contribute to a plan when an employer is matching contributions.
Choosing a 401(k) plan for your small business
Setting up a 401(k) plan for your business may not be as difficult as it sounds. One of the first decisions you need to make is whether you will set up the plan yourself or hire a professional (a third-party administrator, mutual fund provider, or insurance company) to help you get your plan off the ground. Most small business owners find the most cost-efficient way to establish and manage a 401(k) plan is to use the services of an outside professional.
The first step in setting up a 401(k) is to determine its structure. There are three different kinds of basic 401(k) plans: traditional, safe harbor, or simple. However, each type of plan follows different rules concerning how contributions may be made.
1. Traditional 401(k) plan
In a traditional plan, employers can make contributions and/or match employees’ deferrals, and companies can implement a vesting schedule that require employees to serve the company for a certain amount of time before receiving the matched contributions. Employees can make contributions through payroll deductions. Annual tests are made each year to ensure that employees receive proportional benefits.
2. Safe harbor 401(k) plan
A safe harbor plan is similar to a traditional plan, but the tax rules are not as complex. Employer contributions must be fully vested immediately and it’s not subjected to annual testing.
3. Simple 401(k) plan
A simple plan would be best for companies with 100 or fewer employees. Employees cannot receive contributions or benefits accruals from other plans from the same employer and it’s also not subjected to annual testing.
How to set up your 401(k) plan
Once the company chooses which plan to implement, the retirement plan can be set up by a number of different companies or firms. It is very important for you to take into consideration which company could offer the absolute best service in setting up your 401(k) plan. One of the main factors that will determine which service provider will most benefit you and your company is the size of your company. The best service provider for a small business will differ significantly from the best service provider for a big business.
If you are a small business owner, the best possible choice for you would likely be a third-party administrator. This is because your small business may not receive as much attention from a service that generally works with medium-sized or large companies and corporations. Employers who decide to use a third-party administrator can pick and choose from investment options.
If you are a medium-sized business owner, the best possible choice for you would be a mutual fund provider. These providers have a number of different examples of plans that they have available for you to use. They have pretty low startup fees and yearly maintenance costs for their basic 401(k) retirement plans. Although mutual fund providers are great for medium-sized businesses, they are not the most suitable choice if you are looking for a more complex plan.
If you are a large business owner, the best choice may be an insurance company. These companies are best for administration of complex retirement plans. Insurance companies will offer you a variety of investment options, including mutual fund investment options if you are looking for higher growth requirements. However, these plans can be expensive to start up. This will not be a problem for your company if it is a large, money-making company. This is why it is more suitable for larger companies, as opposed to smaller companies who do not make a huge profit, to choose an insurance company.
Once you have set up a plan and decided how to administer it, you will want to inform eligible employees about their options and also educate them about how much money they might need during retirement.
Employees should be encouraged to gain an accurate idea of the costs they can expect and how much they need to save. Additionally, they will need to understand the basic plans and investments available to them in order to make smart decisions with their money.
