This makes having a 401(k) plan a necessity, but 35% of private sector employees don’t even have access to one.
Some companies are afraid of costs. Others don’t understand how easy setting up a 401(k) plan can be. In the 401(k) guide below, we cover 10 things business owners should know about setting up a plan.
What is a 401(k) Plan?
Before you understand what goes into setting up a 401(k) for a small business, there are a few primers that you’ll want to know before you get started. The first is knowing what a 401(k) retirement plan is and how it works.
A 401(k) plan is an employer-sponsored retirement savings plan that an employee pays into. An employer can match all or part of the employee’s contribution. From there, the employee chooses how their money gets invested.
Most plans offer a variety of investment options, like a mutual fund. These options can include stocks, bonds, and money market accounts. There are restrictions to withdrawing funds, unlike a mutual fund.
Often with a 401(k), the employee isn’t allowed to withdrawal from the account. An employee must work for the company for a period of time before they have access to the funds. This is “vesting.”
What Benefits Does an Employer Have from Offering One?
There are two big benefits that an employer has as a result of offering a 401(k) plan. The most famous is the tax breaks.
Matching an employee’s contribution lowers your corporate tax bill. In other words, matching the contribution is tax-deductible. The more you match, the more you lessen your IRS liability on April 15th.
The other benefit business owners get from setting up a 401(k) is greater employee retention. Employers want quality employees and they want them to stick around. When pay increases aren’t a viable option, a 401(k) plan fills the void.
Your Complete 401(k) Guide
There are many myths about 401(k) for business owners. We’re going to debunk some of these myths and answer questions that you may have.
1. Is a 401(k) Easy to Set-up and Manage?
A little more than a decade ago, setting up a 401(k) plan was expensive and time-consuming. Now, setting up a plan for businesses with less than 10 employees only costs a couple hundred dollars in upfront costs.
Maintaining the plan can cost less than $100 per month. You should be able to keep tabs on your plan online 24/7.
2. Are They Complicated?
They can be, but reliable accounting can simplify a 401(k) plan. Keeping track of contributions, earning and losses, expenses, and benefit distributions, will make the plan’s annual return easier.
If it’s offered, sign up for automatic plan withdrawals. Having your company’s matched contribution withdrawn for you will also simplify things.
3. Do I Have to Take on Responsibilities and Risks?
Yes, but so does the plan provider. The IRS lists several responsibilities you as the employer take on as a plan fiduciary:
- That you act only in the best interest of the plan participants and their beneficiaries.
- Give employees notice that they’re in charge of managing their investments.
- Offer at least three diversified investment options.
- Give employees enough information about these options to make informed decisions.
- Follow all plan documents.
Your plan administrator or financial advisor will go over all these in detail.
4. Do I Have to Know the Stock Market to Set up a 401(k)?
You don’t need to have an MBA to understand the 401(k) set-up process. You don’t have to work on Wall Street to be able to follow the investments either.
Due to the popularity of 401(k)’s, there are pre-configured models and many more options to choose from. If you hire a financial professional, they’ll be the expert who helps you every step of the way.
5. How do I Choose a Plan?
The contributions get invested in a portfolio. A portfolio is a diversified group of mutual funds, stocks, bonds, money market accounts, and other investment options. Your financial advisor will go over all the available plans with you.
Your employees can choose the types of investments they want to make in a plan called a “beneficial fund.” The choices are straight-forward, carry low fees, and follow approaches that are well-researched.
When researching, look at plan providers that package up payroll and other benefits.
6. Should I Hire Financial Advisor or Planner?
This is a decision that only you can make. Hiring a financial advisor or certified financial planner (CFP) comes with great benefits. They will know the ins and out of 401(k) rules and regulations and understand how investments work.
Their fees range from commission-only to fee-only and based on your portfolio could run thousands of dollars.
7. What are the 401(k) Requirements?
The IRS has contribution limits on 401(k) plans. This year, employees less than 50 years old can contribute up to $18,500. Participants 50 and older can make “catch-up” contributions up to $6,000.
While you can’t withdrawal from the 401(k) at your leisure, there are exceptions to the withdrawal rule. If an employee experiences a major life event, they can make a withdrawal from the account after filing the proper paperwork. Depending on the situation, they’re borrowing from the account and have to pay it back.
8. I’m Cash-Strapped and Can’t Match Contributions
It’s a myth that employers have to match contributions. You don’t.
While we discussed the benefits of matching, it’s understandable if your business is going through a rough patch and can’t match contributions.
9. What Fees Do I Pay?
401(k) fees get categorized into three sections:
- Plan administration fees: Covers day-to-day administration that includes accounting, plan recordkeeping, electronic access to plans, daily valuations, etc. You, the employer, pay these fees.
- Investment fees: Investment management and other services. These account for the largest portion of fees and get deducted from a participant’s investment return.
- Individual service fees: These fees are for services used by an individual. This would be fees for taking out a 401(k) loan. The participant pays the fees according to the plan.
It’s important to research plan fees. Also, keep in mind if you have more than 100 employees, you will get audited every year. This affects the fee as well.
10. Do My Employees Even Care if They Have a 401(k)?
They do! Two out of three employees surveyed say they value a solid 401(k) plan over getting a raise.
Take a New Direction
A lot more goes into planning for your future than having a great business plan and reading a 401(K) guide. You need personalized service when it comes to your finances. That’s where SurePath Wealth Management comes in.
Every banker, broker, and adviser promises client-based solutions. We make it our business to deliver. Our focus provides our clients with actionable advice that leads to a tangible impact.