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How to Choose a 401(k) Plan for Yourself and Your Employees

Employee Benefits

You've worked hard to make your small business succeed. You care about your employees and want to offer them all the benefits you can afford. Now you're ready to provide a company-sponsored 401(k) retirement plan — for yourself and for your employees. It's a valuable perk that allows each person to decide how to invest his or her money.

A 401(k) plan lets participants save and invest a portion of their paycheck before taxes are taken out. Saving with tax-deferred dollars means no federal or state (if applicable) income taxes are paid on the money until it's withdrawn, which is generally at retirement when beneficiaries will likely be in a lower tax brac?ket than today.

No longer just for large companies, 401(k) plans now can fit into the scope and budgets of small firms. You may have educated yourself about common misconceptions that often deter small businesses from adopting 401(k) plans, and understand that:

  • Any size company can benefit from a 401(k);
  • Employer matching of employee contributions is not required for employees to enjoy many benefits; and
  • Plan management fees are affordable for small companies if you look for administrators that specialize in serving your market.

So how do you go about choosing a 401(k) plan?

Select a 401(k) service provider for the long haul

Start by researching the many financial firms that provide recordkeeping and third party administration services for 401(k) plans: mutual fund companies, brokerage firms and insurance companies. Look for an established business with a first-rate reputation in the 401(k) arena. You want a company that will serve you and your employees now and for many years to come, with extensive resources and excellent customer service.

Contact owners of businesses similar to yours to learn about their experiences with 401(k) plan service providers, and ask what companies they'd recommend. If your firm has a financial adviser or accountancy service, get their input for your decision.

The U.S. Department of Labor and the Internal Revenue Service have posted extensive information about 401(k) plans on their websites. The Society for Human Resource Management (SHRM) provides a wealth of 401(k) information, although access to some of it requires membership in SHRM.

Next, choose the type of 401(k) plan

Once you've chosen a 401(k) plan service provider, you need to decide on the type of plan that's best for you and your employees. Three options are available to employers of any size: a traditional 401(k) plan, a safe harbor 401(k) plan or an automatic enrollment 401(k) plan.

  • A traditional 401(k) plan is the most flexible. You decide whether to make contributions for all participants, to match employees' deferrals, to do both or do neither. (Employer contributions are tax-deductible, up to certain limits, so you reap tax savings) You decide whether to create a vesting schedule, which establishes employees' rights to employer contributions after a period of time.
  • A safe harbor 401(k) plan has several variations, and requires that employees receive a certain level of employer contributions. Traditional safe harbor plans mandate that employer contributions are fully vested at the time they're made.
  • An automatic enrollment 401(k) plan allows you to automatically enroll employees and place deductions from their salaries in certain default investments, unless employees elect otherwise. This arrangement encourages workers to participate in the company 401(k) plan. Automatic enrollment plans may also contain a safe harbor provision.

Once you've chosen your 401(k) service provider and the type of plan best for you and your business, you can work with the service provider to get it established.

Set up a 401(k) plan

Setting up a 401(k) plan is a four-step process. With your service provider:

  • Receive an Adoption Agreement and Basic Plan Document that specify the plan's provisions. The 401(k) service provider usually provides this.
  • Arrange a trust for the plan's assets to ensure that they're used only to benefit participants and their beneficiaries;
  • Establish a recordkeeping system to track and attribute contributions, earnings and losses, investments, expenses and benefit distributions. Your 401(k) service provider typically provides this function. Careful recordkeeping helps you and the service provider prepare the plan's annual filing with the DOL and IRS; and
  • Provide your employees with all necessary information to participate in the 401(k) plan: Notify those who are eligible, provide a summary plan description and distribute information about a 401(k) plan's benefits, such as pretax contributions, employer contributions (if you decide to make them), and compounded tax-deferred earnings.

Establishing a 401(k) plan for your small business makes your company more attractive to job-seekers, helps you retain current staff, offers opportunities for tax savings and allows you, the employer, to garner valuable retirement benefits as well.


This website contains articles posted for informational and educational value. Paychex is not responsible for information contained within any of these materials. Any opinions expressed within materials are not necessarily the opinion of, or supported by, Paychex. The information in these materials should not be considered legal or accounting advice, and it should not substitute for legal, accounting, and other professional advice where the facts and circumstances warrant.
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