Why Small Businesses Should Consider Setting Up a 401k Plan

December 6, 2023


There are several things to consider before setting up a 401k plan. Some key points include arranging a trust for the plan's assets and determining investments that meet participant needs. 401(k) plans can provide many advantages to employees and business owners. Some significant benefits are cost, tax deductions, and investment flexibility.

Setting Up

If your business wants to provide employees with a competitive benefits package, consider adding a 401(k) plan. This tax-advantaged retirement savings vehicle allows employees to make pre-tax contributions matched by the employer. Funds are invested in mutual funds to help them grow over time. A 401(k) is one of employers' most popular and valuable employee benefits. How to set up 401k plan? Setting up a 401(k) requires some basic tasks. The first is to adopt a written plan document, which describes the specific terms of your plan. This can be done independently, or you may hire a professional or financial institution to assist. You'll also want to develop a recordkeeping system to track and report contributions, earnings, losses, plan investments, expenses, and benefit distributions in participants' accounts. Once you have your plan documents and adoption agreement, the next step is to set up a trust to manage your 401(k) plan. Your 401(k) service provider can create trust for you, and they will typically give you a form to use that's easy to understand. You'll need to select a trustee for your 401(k) plan, and this is often the business owner or someone in a similar role. The final step is to roll out your 401(k) plan to your employees. We'll work with you to provide a 401(k) kickoff email, videos, and guides, and we'll also help you set up automatic contributions through your payroll.


The 401(k) is an excellent way for employees to save tax-deductible money for retirement. Employees can choose how their contributions are invested in various mutual funds. Most 401(k) plans also offer employer matches, which are tax-deductible. The amount of money you make in your 401(k) will be impacted by the types and amounts of investments you choose, your company's matching contribution, how much you contribute each year, and the number of years until retirement. Moreover, 401(k) plans protect assets from creditors by being held in trust. This can be particularly beneficial for small business owners, as they may otherwise be at a disadvantage to more giant corporations when offering benefits. Small business owners wear many hats and often struggle to find time to keep up with administrative tasks. Choosing a provider that offers payroll integration can minimize the maintenance work required by your retirement plan by automating employee data updates and compliance monitoring. This will save you valuable time that you can put toward other essential business needs.


A 401k plan allows employees to choose investments from the company's pool of options. These investments are not FDIC-insured and may lose value. Most employers offer a range of mutual funds. A common choice is a target-date fund, which places participants' contributions into a single investment that automatically grows proportionately to their expected retirement date. Target-date funds typically include a mix of stocks and bonds and a decrease in exposure to risk as workers approach retirement. Investors should focus on the expense ratio of the funds they select. In addition, investors should consider whether their 401(k) plan offers a managed account option. This feature has gained traction recently as it enables participants to enter information about their family situation and investing goals and then receive recommendations for a portfolio. Employers that allow this option must provide the initial plan-related information as part of a new participant's Individual Benefit Statement and provide updates on fees and expenses at least quarterly.


There are several options for small business owners looking to offer retirement plans, including SIMPLE IRAs, SEP IRAs, and regular 401(k) plans. Unlike traditional 401(k) plans, SIMPLE and SEP IRAs require little or no documentation, annual testing, and limited (if any) ongoing government filings. This makes them a good option for businesses with minimal financial resources and time constraints. 401(k) plans are a great way to motivate employees to save for retirement, thanks to tax-deferred earnings and the ability to invest pretax dollars. Many plans also allow companies to automatically enroll employees and increase contributions each year unless they opt out, making it easy for workers to grow their savings on cruise control. However, several fees are associated with 401(k) plans, including plan administration, investment management, and individual service fees. Some providers also charge revenue sharing, a hidden fee that takes a cut of the profits from fund returns. This can significantly impact investment returns over time, making it essential to do your homework when choosing a provider.

Attract and Retain Employees

Retirement benefits are increasingly seen as crucial for attracting and retaining employees. A study found that two-thirds of workers said retirement plans were essential in choosing their employer and that they were more likely to stay at a company with a 401(k) plan. The fact that many businesses need to offer a 401(k) or similar savings vehicle sets their employers at an immediate disadvantage in recruiting and retaining employees. Employees expect a company to match employee contributions, and if you do not, you could lose top talent to competitors that do. When you choose a 401(k) plan provider that offers low administration fees, cost-efficient investments, and consultative planning services, you can reap the rewards of your investment with a retirement plan that will help to attract and retain high-quality employees. In addition, user-friendly payroll and retirement planning software helps ensure that your employees are well-engaged with their savings. A simple retirement calculator can show employees how their pretax contributions can grow.


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