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You Want to Offer a 401(k) For Your Employees. As a Small Business Owner, These Are the 3 Next Steps to Take Thumbnail

You Want to Offer a 401(k) For Your Employees. As a Small Business Owner, These Are the 3 Next Steps to Take

  Paul Tarins, RICP®,WMCP®,CSRIC™

As the owner of a small business, you understand better than anybody how important it is to take care of your employees. That’s how you attract top candidates, and that’s how you improve employee retention. 

 There is one benefit that you can offer that is sure to both increase the satisfaction of current employees and get you on the radar of potential employees. That perk is: a retirement plan, such as a 401(k).

 Many small business owners are intimidated by the process of setting up 401(k)s for their employees. It takes time and money and effort that you may not feel like you have.

 However, you may come to the realization that it’s worth your energy to enroll your employees in 401(k) plans. If you do, you’re going to need a plan for your plans. Here’s how you can get started in setting up a 401(k) system for your employees.

Step #1: Research Plan Providers

When you venture into the vast realm of plan providers available, you might feel overwhelmed. However, that doesn’t have to be your experience. While there are a great multitude of options available, there are resources and information at your disposal that can set you in the right direction.

 One thing you can do is ask other local small business owners for their thoughts on different providers. Their recommendations can be invaluable in determining what provider will do the best by your company.

 But maybe that’s not an option. Maybe you don’t want to talk to your potential competitors, or you don’t have many connections in your market, or you simply don’t feel like that’s the right choice for you. If you can’t connect with other local business owners or networks, you can find information online that can direct you towards the provider that’s right for you. 

 What’s most important at the end of the day is that you find a provider who suits both the needs of you and your small business, and the needs of your employees. A provider that treats your employees poorly at every turn is unlikely to produce the desired positive effects, after all, and in that same vein, a provider that fails to deliver won’t be beneficial to your company. 

 At the end of the day, gathering all the facts you can regarding what to look for (and what to avoid!) is the best way to create a positive outcome for yourself. The advice of either fellow business owners or anyone else who understands your industry the way you do is some of the greatest help you can receive. 

Step #2: Choose a Plan

There are a few different types of 401(k) plan that you can offer, all similar but each slightly different. It’s a good idea to research all of the options available in order to determine what is most suitable for your business, your finances, and your employees. 

 The options available include:

Traditional 401(k) Plan

This is the classic, the old standby. According to the Society for Human Resource Management, about 93 percent of businesses with a defined benefits plan offer a traditional 401(k) plan.

 This flexible option allows employers to make matching contributions, which can serve as an incentive for greater employee participation. The money employees choose to have automatically placed in their 401(k) is tax-deferred, meaning participants don’t pay taxes on that amount until earnings are withdrawn.

 It’s important to note that traditional 401(k) plans are subject to annual nondiscrimination tests, called the Actual Deferral Percentage (ADP) and Actual Contribution Percentage (ACP).2 These tests are set in place by the IRS to determine whether or not employer matching contributions are favoring high-income earners within that business. 

Roth 401(k) Plan

This option is similar to a traditional plan, however, contributions by employees are made with after-tax dollars. Therefore, withdrawals made in retirement will be tax-free. About 59 percent of businesses offering retirement plans opt for a Roth 401(k) plan (or similar defined contributions plan) for employees.

 Just like a traditional plan, you may choose to make matching contributions in a Roth 401(k) plan.

Safe Harbor 401(k) Plan

A safe harbor 401(k) plan is fairly similar to a traditional plan, but there are a few important variations. For example, employer contributions must be fully vested when made. Employers can choose to offer matching contributions only to employees who defer, or they can be made on behalf of all eligible employees.

 Unlike traditional 401(k) plans, a safe harbor is not subject to the IRS strict nondiscrimination tests that must be completed annually. 

SIMPLE 401(k) Plan

SIMPLE 401(k) plans are designed specifically for small businesses as a cost-effective retirement plan option. Employers with fewer than 100 employees may use this plan, which acts similarly to a safe harbor 401(k) plan. Employer contributions must be fully vested when made, and SIMPLE 401(k) plan providers are not subject to the annual nondiscrimination tests.

Automatic Enrollment 401(k) Plan

Unless the employees explicitly choose to opt-out or change their percentage, automatic enrollment - just as it sounds - automatically enrolls eligible employees into a 401(k) plan that defers a percentage of their pre-tax earnings.

Step #3: Find Your Partners

Once you’ve selected your provider and plan type, there are a few other parties with whom you might engage in order to make sure that the entire 401(k) process proceeds smoothly and efficiently.  

  • 401(k) recordkeepers or plan providers: Recordkeepers are in charge of keeping track of the important details about your plan. This could include whose participating, what they’re invested in, when money is added/removed, etc. 
  • Third-party administrators: Having a third-party administrator allows business owners and small human resources departments to outsource the administrative work that goes into maintaining a 401(k) plan.
  • 401(k) advisor(s): Your 401(k) advisor can essentially take the lead on assuming the legal responsibilities of your business’s plan, as well as the heavy lifting involved with establishing a 401(k) plan. They can work with your employees one-on-one to answer questions about the plan and work to keep your plan fees down as you continue to grow.

 As you begin to navigate your options, you’ll want to choose providers and partners carefully, as they can make or break the effectiveness of your 401(k) plan. Remember as you’re making these decisions that they impact both your business and your employees, and that there is a synergistic relationship between the company and its employees. Making your choices carefully is key to creating a positive situation for all involved parties. 

 Setting up a 401(k) plan for your business may be an intimidating process, but it doesn’t have to be an overwhelming one. By following these steps and being precise in your decision making, you’ll be able to craft the perfect retirement plan.


 Paul Tarins is an investment adviser representative of and offers investment and advisory services through Portfolio Medics, a registered investment adviser. Nothing contained herein should be construed as a solicitation for investment advisory services. Sovereign Retirement Solutions and Portfolio Medics are not affiliated.