As an employer, offering a 401(k) plan is crucial to standing out—especially since many people now expect employers to offer retirement benefits. In the 2023 Charles Schwab Participant Study, 88% of respondents said a 401(k) is a must-have benefit.
That said, having the right retirement plan can help you stay competitive and not only bring in but also hold onto top talent. Employers can also enjoy tax benefits and owner retirement savings options. And yes, there are 401(k) options that suit small business needs without breaking the bank!
Before starting a 401(k) plan for your organization, however, there are certain things to look for and steps to take to ensure you select the best option for your company and employees. Keep these considerations in mind as you research providers and plan types.
Select a 401(k) Plan Type
As you research and start a 401(k) plan for your small business, consider the following plan types.
Traditional 401(k)
- Allows pre-tax employee contributions
- Allows post-tax (Roth) employee contributions
- Offers flexibility in employer contributions
- Requires annual nondiscrimination testing
Safe Harbor 401(k)
- Simplifies the process by avoiding nondiscrimination testing
- Helps employees maximize salary deferrals
- Company matching contribution is required
- Company match must be 100% vested immediately
Choose 401(k) Providers & Understand Their Roles
Next, you’ll need to select your team to help your business start a 401(k) plan. Key providers include a fiduciary investment advisor, third-party administrator (TPA), and recordkeeper.
The best option for your business depends on how much you want to handle internally or outsource and how much guidance you need. These professionals can handle everything from setup to compliance and administrative tasks to complete plan maintenance.
Of course, most small to mid-sized businesses outsource 401(k) plan management because of the complexity and liability involved. Working with an investment advisor can help you provide optimal benefits to your team, ensure compliance, and protect your company. More on their specific roles below.
Investment Advisor
First and foremost, find an investment advisor that is a fiduciary—meaning they must act in the client’s best interest. These firms typically have flat fee structures, allowing you to find an advisor who fits your small business’s budget and specializes in 401(k) plans.
The advisor plays a critical role in selecting the TPA and recordkeeper. They will also lead the plan design conversation, select and monitor the plan’s investment portfolio with personalized service, and assist the plan sponsor with the following items on an ongoing basis:
Employee Communication
- How to enroll
- Contribution limits
- Investment options
- Plan benefits
- Group and individual employee education and engagement
Fiduciary Oversight & Responsibilities
- Establish investment policy statement
- Monitor plan investment options
- Create and maintain a fiduciary file
- Facilitate Plan Sponsor Retirement and Investment Committee
- Conduct fee benchmarking
Third-Party Administrator (TPA)
A TPA generally handles the essential compliance and paperwork, such as required testing, Form 5500 filings, and plan design. However, they don’t provide financial advice, choose funds, or provide full plan management.
Once you’ve selected a plan type and how it will be managed, the first step to actually starting a 401(k) is creating the written plan document—something your TPA can assist you with. This essential document outlines the plan’s terms and operations. As the foundation for everyday plan management, it must comply with IRS regulations.
This is typically included in plan administration, so if you haven’t partnered with a retirement plan professional, consider doing so. Remember, you are bound by the terms of the plan document, so ensure it’s written carefully to serve both your company and your employees.
Recordkeeper
A 401(k) plan requires a robust recordkeeping system to track contributions, investments, earnings and losses, and distributions. Accurate records are crucial for compliance and reporting purposes. For example, you’ll need these records for nondiscrimination testing and filing your annual Form 5500 with the IRS.
When setting up a 401(k) plan, you must also establish a trust to hold the plan’s assets. This ensures the funds are used exclusively for the benefit of the participants and their beneficiaries. The recordkeeper facilitates this process by providing necessary documentation and depositing plan assets into the custodial account.
One trustee must handle contributions, plan investments, and distributions. This is one of the most important decisions since these activities impact the plan’s financial integrity. Another fiduciary, often the employer as the sponsor, has to choose the trustee.
The recordkeeper will implement the plan design features into their automated online recordkeeping platform.
Other Important 401(k) Plan Sponsor Considerations
Understand Your Fiduciary Responsibilities
As a plan sponsor, you are a fiduciary—meaning you must act in the best interests of the participants and their beneficiaries, as required under ERISA (Employee Retirement Income Security Act). This includes:
- Selecting and monitoring plan providers, investment options, and performance
- Ensuring reasonable plan fees
- Offering diversified investment options
- Following the written plan document
- Depositing employee contributions in a timely manner (i.e., a few days after payroll)
- Filing required reports and information
The thought of knowing and keeping up with all of these changes can be intimidating. But when you partner with a professional like a financial advisor who is also a fiduciary, they can help you address these responsibilities and maintain compliance.
Know Your 401(k) Plan Costs
So, how much does a 401(k) really cost? Setting up a small business retirement plan can involve startup fees, administrative fees, investment management fees, and costs for professional services.
Regardless of which type of provider you choose, don’t be afraid to ask about their fee structure—this is vital to adhering to your fiduciary duties and keeping the plan affordable for your business and employees.
Encourage Employee Participation
As mentioned above, higher plan participation can be good for both you and your employees and boost the plan’s effectiveness. In addition to clear, consistent communication, you can make your small business 401(k) plan desirable by incorporating incentives like a matching contribution or automatic enrollment.
Employer matches are becoming more expected and can make your business even more attractive to top talent. In fact, the Plan Sponsor Council of America found that 98% of companies offering a 401(k) in 2023 made some type of matching contribution.
You can determine how much to match and stay within your budget while helping employees boost their retirement savings. Employer matches typically range from 2% to 6%, with a 2024 study by Vanguard reporting an average employer match of 4.6%.
By offering automatic enrollment features, you can also streamline retirement saving for employees. This allows you to automatically deduct a set percentage or amount from an employee’s salary toward their 401(k) unless they opt out.
Stay Up On Compliance & Updates
This ties back to your duty as a fiduciary: Once you start a 401(k) plan, you’ll need to stay updated on regulations and ensure your plan remains compliant with IRS and Department of Labor (DOL) requirements. Regularly review and update the plan as needed to align with legal and company policy changes.
Again, this is much less overwhelming and confusing when you work with a professional like a financial advisor.
Whichever avenue you choose for your small business 401(k) plan, when you consider these steps and factors comprehensively and know which questions to ask, you’ll be heading in the right direction!
Are you ready to start a 401(k) but wondering how? At FSRP, we have vast experience in this area! Contact us today to learn how our financial advisors will help you offer the best retirement plan for your employees and business.
Securities and advisory services offered through Commonwealth Financial Network, Member FINRA/SIPC, a Registered Investment Adviser. Financial Strategies Retirement Partners (FSRP) is a Registered Investment Adviser. Financial planning services offered by FSRP are separate and unrelated to Commonwealth.