What is a 401(k)?

A 401(k) is a company-sponsored retirement plan that employees can use to save money for the long term. It’s a type of qualified retirement plan, meaning it gets certain tax benefits unavailable to nonqualified plans. For the most part, employees don’t pay taxes on the money they put into a 401(k) until they withdraw it, allowing them to earn more in interest over time.

Related:How to Set Up a 401k Plan for Your Business

Benefits of offering a 401(k)

Offering a 401(k) retirement plan makes your business more competitive by providing long-term financial benefits. Retirement plans attract top talent and give employees a reason to become more invested in staying with your business and promoting its success. Some types of 401(k) plans also make your business eligible for a tax credit to offset the costs.

Selecting the right 401(k) plan for your business

There’s a wide range of retirement plans and several providers to choose from. The terms of a 401(k) plan impact your legal liability, your employees’ ability to save and your company’s bottom line. Follow these steps to choose a plan type that works for you.

Set a budget

Look at your company’s finances, and determine how much you can afford to spend on 401(k) administration and other associated payments. You’ll find a range of fees and options among any list of 401(k) companies, so comparing the costs helps you find a company that fits your budget.

Larger budgets allow you to consider options, such as matching employee contributions. Even though hiring 401(k) companies to administer the program costs money, it’s necessary to handle the program smoothly.

Read more:Budget Management: Three Skills Essential for New Managers

Research your options

Study the different types of 401(k) programs and their contribution limits. Some 401(k) options have a cap on how much employees can contribute, limiting how much high-earning employees can save. Some of the popular types of 401(k) plans are:

• Traditional: Employee contributions come out before taxes to reduce taxable income. The employee pays taxes on the amount when they withdraw it.
• Safe harbor: This type is similar to traditional 401(k)s, but the employer makes mandatory contributions to all employees’ accounts. Another difference is the elimination of nondiscrimination testing that happens yearly with a regular 401(k) to ensure higher compensated employees aren’t contributing significantly more to their 401(k) accounts than lower compensated employees.
• Roth: Roth 401(k) contributions come out of the employee’s pay after taxes have been deducted, so the employee doesn’t have to pay taxes when they withdraw the money.
• Solo: This is a single-person option designed for business owners who don’t have any employees.
• SIMPLE: Designed for businesses with no more than 100 employees, this option offers similar tax benefits to the traditional 401(k). The employer can either make contributions that match dollar-for-dollar up to 3% of salary or a 2% nonelective contribution to eligible employees.

Assess risks

Administering a 401(k) plan on behalf of your employees can give you some level of fiduciary liability, where you’re responsible for making smart investment decisions on behalf of account holders. Some plans allow providers to take over or share this liability, protecting your business. Do a risk assessment to determine what level of support you need in a plan from retirement plan companies.

Determine your time commitment

Your 401(k) managers help your business by providing financial advice, keeping records and handling contributions. Some plans will take more of your time and attention than others, so research plan details to determine how much time you’ll have to spend managing the options. Ensure you fully understand what each company will provide for you if you hire them as your administrator.

Evaluating 401(k) providers

All 401(k) providers assist small businesses with planning, implementation, record-keeping and management of employee retirement plans. The level of involvement of the provider in plan implementation depends on the company and the plan you choose. Thoroughly research each provider you’re considering by evaluating each of these aspects and comparing your options:

Reputation

Read client reviews to assess the reputation of various 401(k) administrators. Feedback from other users on the ease of experience, quality of investments and other factors can help you determine which company best suits your business needs. Learn about different providers’ reputations when it comes to meeting deadlines, providing legal guidance, overseeing advisors and processing information requests.

Certifications

Inquire about the certifications and licenses of the people who work for each 401(k) provider. Financial advisors who are certified as Registered Investment Advisors have a legal obligation to uphold the best interests of you and your employees. Some investment brokers and insurance agents also provide 401(k) plans, but they don’t have the same legal responsibility to protect your finances.

Investment options

When you’re exploring the list of 401(k) companies, consider the variety of investment options each one offers. Stocks, bonds and other securities are common, but each company likely has a variety of options within each category. Having lots of options for investment choices gives your employees more control over their retirement funds.

Administration and customer service

Ask about the administrative processes each provider has in place to set up your company plan, manage employee information and respond to questions, updates and plan changes. Providers that offer hands-on support can be especially beneficial to small businesses that have never managed employee 401(k)s before.

A strong customer support team also makes it easier for your employees to access information about their plans and make changes when necessary, allowing them to get the most out of their benefits. Look for a company that helps educate your employees about their investments, with the option to meet with retirement specialists for support.

Related:Benefits Enrollment: Best Practices for Your Company

Fees

All 401(k) providers charge fees to both business owners and employees in exchange for the service of managing their 401(k) plans. Fees pay for the services of accountants, lawyers, record keepers and other investment professionals. The three main fees involved with a 401(k) are:

• Investment fees:Employees pay investment fees, so investment managers can actively manage their money. The more involved a provider is in managing investments, the higher the investment fees.
  
• Administration fees:Employers or employees can pay administrative costs as either a percentage or a recurring flat payment.
  
• Individual service fees:Some plans have optional features that you only pay for if you elect to sign up, such as financial advice or transferring funds from one account to another.

You’ll also want to consider the expense ratio associated with the 401(k)s a provider offers. The expense ratio is the percentage of an investment that goes toward covering overall fees. The lower an expense ratio, the less your employees will pay in fees. Most 401(k)s cost 1-2% of the total amount contributed to the retirement account.

User-friendliness

Explore the benefits interface of each provider. The website and software should be intuitive and easy to use for employees. Features, such as payroll integration, online reports and chatbots can help you and your employees set up and track benefits and contributions.

Scalability

Assess 401(k) providers based on how they can fulfill your company’s needs now and in the future. Project growth, and search for a company plan that could scale with your business and provide comprehensive support for a larger workforce with different retirement needs.

Consider how the plans might change as you grow. For example, some 401(k) administrators have varying fee structures based on the number of employees you have. Increasing your workforce could change your fees. Review the fees at all levels, not just where you are now.

Experience

Look at the type of 401(k) experience each company offers to find one that has helped companies like yours in the past. A provider who deals mainly with large corporations won’t have the understanding of what a small company like yours needs. Find a company that routinely helps small businesses and understands the regulatory requirements that apply to your company.

FAQs about small business 401(k)s

How much does it cost to set up a 401(k) plan for a small business?

Small businesses can expect to pay between $500 and $3,000 to set up a 401(k), in addition to ongoing monthly fees for each employee.

Can small businesses offer a 401(k)?

Any size business can qualify to offer 401(k)s, including small businesses and sole proprietorships. Different types of 401(k) accounts might be a better fit for smaller companies. For example, the SIMPLE 401(k) is for small businesses with 100 employees or less.

What is the difference between a SIMPLE IRA and a 401(k)?

A SIMPLE IRA is a retirement plan designed for companies that employ fewer than 100 people. Employers have to contribute to SIMPLE IRAs, while 401(k) employer contributions are optional.