How To Start a 401k Plan For Your Employees
If you’re a growing company with ambitions to be successful, offering a good 401k plan for your employees should be a priority. 401k plans help you to attract and retain good employees and offer your staff the opportunity to save for their retirement.
While it’s unlikely that you will set up a 401k plan yourself – you will probably use an outsourcing firm – it’s important that you understand how a 401k plan works before you set one up for your staff. So, here are three things to consider when you start a 401k plan at your company.
Decide what sort of plan you want
Jewell Lim Esposito, partner in the benefits practice group at the national labor and employment law firm Constangy, Brooks & Smith, LLP, says that one of the most common mistakes that companies make when setting up a 401k plan is not knowing why.
He said: “If it’s a tool to be competitive in the marketplace, then design the plan in such a way that employees are rewarded. If it’s a tool for retention, then build in safeguards and incentives for employees to stay at the company and in the plan. If it’s a tool to compensate management, then do the company contributions so that they flow through to management – in a legal way.”
While there are lots of different types of 401(k) plan, the two most common plans are:
- Traditional 401k plan – you contribute a percentage of each employee’s income or you match the amount your employee chooses to save
- Safe harbor 401k plan – similar to the above but under most safe harbor plans, mandatory employer contributions must be fully vested when they’re made. That means that any contributions you make to the employee’s 401k are theirs immediately
If you’re starting a new 401k plan, it pays to make it a good one. If you create a good quality 401k(k) plan it can help you to attract and retain good employees.
Budget for fees
You are likely to pay some fees for setting up a 401k plan. The fees will vary depending on the complexity of the plan, the size of your company and the number of employees you have.
Dennis R. Marvin, CFP and principal of Marvin Wealth Management in Cleveland, Ohio says that if you are a small business owner with a couple dozen employees you should budget for $1,500 to $3,000 to get a 401(k) up and running.
However, it may be less. Mr Marvin said: “Some 401(k) providers might waive or reduce the startup costs.” However, you can expect to pay administration fees, investment fees (which are deducted from the return from the investment) and maybe even individual service fees that each participant in the plan has to pay.
Make sure your 401k is compliant
Once your 401k plan is up and running it is important that it remains compliant with the law.
For traditional 401(k)s, there is annual testing in place designed to ensure that every employee can benefit from a 401(k). At least once a year you are required to test that the benefits of your 401k plan aren’t skewed in favor of Highly Compensated Employees (those earning over $110,000) over your non-highly compensated employees.
If the test fails, your 401(k) could lose its tax-qualified status, and all contributions and earnings would have to be distributed to all the plan participants.
Are you thinking of setting up a 401k plan or have you recently done so? Share your thoughts in the comments below.
I set up a 401k plan at my business in 2011. I think it is a great idea to do this – it helps people to save for their retirement and is a great additional employee benefit.
Kyle – thanks for your comment. They can be an excellent way to attract and retain good staff.
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