5 Tips for Starting a 401(k) Program for Your Business's Employees
By providing the benefit of retirement savings, you can position your business to attract top talent and gain valuable tax benefits. Plus, once the 401(k) program is set up, you can rely on trusted advisers and administrators to handle most of the ongoing maintenance.
Still, starting the program off correctly is critical, and you’ll need to educate yourself so you can determine the best strategy from the beginning. In this post, we’ll help you do that by offering five tips for starting your business’s 401(k) program.
How to Start a 401(k) Program for Your Small Business
1. Understand Your Options
The IRS outlines three types of 401(k) plans; the traditional, safe harbor, and SIMPLE 401(k) plans. You should familiarize yourself with each one of these options, so you can select the format that best fits your business needs.
The plans differ in terms of eligibility and how and when you, as the employer, make contributions to your employees’ plans. For example, while a traditional 401(k) gives employers discretion over their contributions, a SIMPLE plan has stricter requirements. Plus, you can only start a SIMPLE plan if you have 100 or fewer employees.
In addition, the complexity of maintaining a compliant 401(k) plan depends on which type you choose. As you can see, there’s a lot to evaluate so you should consider consulting a retirement plan professional before making any decisions.
2. Consider Outsourcing Part or All of Your Plan Administration
Speaking of consulting a retirement plan professional, you’ll likely benefit from outsourcing at least a portion of your 401(k) plan. There are four steps you should take to set up and maintain a 401(k) plan:
- Adopt a Written Plan
- Set Up a Trust for Your Plan’s Investments
- Maintain Records to Track Participant’s Accounts
- Keep Plan Participants Informed
You can outsource each one of these tasks to a qualified professional. However, you should note that even when you outsource certain tasks, you may still be liable for the investment decisions that the people you hire make. So, choose this partner carefully.
4. Understand Your Liabilities
Liability can be a tricky issue, but it’s important to understand. Employees who lose money and feel that you’re to blame might file expensive lawsuits. You can protect yourself, though, by understanding the different levels of fiduciary protections you may choose from. Certified Financial Planner, Michael Chamberlain, lays out the four types of fiduciary responsibility that you should be aware of, so we suggest checking out that article.
By understanding each of these distinctions, you can hire investment managers and plan administrators that reduce or eliminate your liability.
5. Pay Attention to Fees
A good 401(k) plan offers a diverse variety of investments with low management fees and reasonable administrative costs. Make sure that when you evaluate different plans, you’re paying close attention to these fees. Seemingly small fees can have a big impact on you and your employees’ long-term investment returns.
Plus, management fees may differ significantly between investments, from as low as a tenth of a percent to as high as 2 percent.
6. Ask for Employee Feedback Before Starting a Plan
Part of the reason you’re starting a 401(k) plan is to improve employee satisfaction and to retain your top talent, so why not ask them what they think? Talk to your employees to find out what they’re looking for in a retirement plan. They’ll appreciate being included and you’ll get a better idea of how to structure your plan. Plus, if your current employees like your plan, it’s likely that future hires will too.
Conclusion: Lean on Your Resources
With a good 401(k) plan in place, you’ll discover plenty of benefits. Before that, though, you should do your due diligence. Take your time as you evaluate your options, determine how much you can contribute, and interview potential plan and investment managers.
Although setting up the plan may take away from your usual duties, understand that this is a long-term investment in your business. Getting it right the first time will help you avoid risk, maximize your returns, and allow you to focus on your business.
Editorial Note: Any opinions, analyses, reviews or recommendations expressed in this article are those of the author's alone, and have not been reviewed, approved, or otherwise endorsed by any of these entities.