How Your Small Business Can Open a 401(k)
Small Business
Date: 31 Aug 2021

How Your Small Business Can Open a 401(k)

If you own your own business, you’ve probably thought about how to maximize income for the future, both for yourself and your employees. But where can you get started? There are many options for small business retirement plans, and knowing which one to choose can be confusing. 401(k) plans for small businesses are one of the most popular choices for good reason – they help you and your employees plan for the retirement of your dreams, without much stress or hassle for you or for them. Wondering how to set up a 401(k) plan for your small business? We have your complete guide right here.

Step One: Find the Right Plan

There are several different types of 401(k) plans for small businesses, which is great news – it means you can select the plan type that works best for your business and your employees.

  • A traditional 401(k) plan takes money directly from an employee’s paycheck and directs it into their 401(k) plan, which can be invested in a range of options. Your business can add a contribution if you’d like as well to match what employees put in.
  • A Safe Harbor 401(k) plan is the same as a traditional plan but with one big difference – it’s mandatory for your company to contribute. Also, you can avoid the required government testing that ensures all employees are being treated equally under the plan.
  • A Simple 401(k) plan is for businesses with under 100 employees, and is easy to administer and run. With this plan, you must match up to 3% of each employee’s pay, or contribute 2% if the employee does not contribute.
  • A Solo 401(k) is designed for small business owners who don’t have any employees, except possibly their spouse. You can make contributions both as employee and employer, and so this plan can be a good vehicle for saving significant amounts of money for retirement.
  • A Roth 401(k) plan lets employees contribute money that they have already paid taxes on, to avoid paying taxes when they withdraw this money in retirement.

Picking the right 401(k) plan for your small business requires thinking about what you’re hoping to achieve with this retirement plan option. Are you looking to maximize your own retirement savings? Increase retention and make your workplace more attractive for new candidates? Ensure your employees can have a safe and stable retirement? These are all worthy goals, but not every plan is right for each one.

Step Two: Pick a Provider

Before you reach out to any potential providers, you should prepare three essential questions to ask. You will want to check out:

  • Their investment lineup – how many funds they offer, how diverse their portfolios are, and past performance.
  • The total fees – heavy fees can offset strong returns, and surprise costs can eat into returns as well.
  • The ease of plan administration – does the plan require highly involved administration, or practically run itself? How easy is it for employees to access and use?

You can use one provider who will take care of everything associated with your small business 401(k) plan – that may include recordkeeping, financial advising, fiduciary responsibility, and administering your 401(k) plan. Or you can opt to use several providers who will each cover part of your needs.

Step Three: Determine Your Administrators

Designating a plan administrator means picking a trustee. Your plan’s assets need to be held in trust to make sure that they’re being used only to benefit the participants of the plan and their beneficiaries – an important job.

A plan trustee is responsible for controlling the plan assets and reporting results regularly to the management team. They collect contributions, invest them, and issue distributions. You can designate the bulk of the tasks of managing the plan to a plan administrator, but the trustee holds ultimate responsibility for ensuring the administrator does its job.

Step Four: Adjust Accounting Processes

Once you’ve picked a plan and decided who will administer and oversee it, your accountant will have some new tasks on their plate. They must now ensure that the 401(k) contributions from both your company and your employees are transferred properly and accounted for.

Since the amounts contributed will be different for each person, this requires careful and consistent attention. A payroll system that integrates with your 401(k) recordkeeper is almost impossible to do without if your business has many employees, so you will want to consider those integrations when picking a plan provider.

Find a Good Advisor

Setting up your own 401(k) plan for your small business is no small task. Depending on the size of your business, the number of your employees, the goals of your 401(k) program, and your own retirement dreams, picking the right plan is not easy. And administering a 401(k) plan can come with many legal requirements, such as fiduciary duty, yearly audits, and non-discrimination testing.

That means you might not want to go it all on your own – you should pick a good advisor who can help you through the whole set up process and allow your plan administration to run smoothly. Working with an expert partner who can ensure your business is in compliance with any applicable laws and that your assets and your employees are in good hands is invaluable. Contact us today to learn more about how we can help you pick the perfect plan, set it up for success, and ensure all assets are safe and secure.

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Joanna Amberger

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