Business Planning

Exploring Your Small Business 401(k) Options

Read Time: 6 min

As a business owner with multiple employees, you may be looking into your small business 401k options. Did you know, almost half of the workforce does not have a retirement plan option at work? Even if their job offers a plan, Americans are struggling to save for retirement. Truthfully, small businesses are less likely to offer these plans than large corporations. Despite this, starting up a 401k for a small business may be easier than you think. If you are a small business, you can offer a small business 401k to show your employees you truly care about their financial future. While you may have asked yourself, “how do I start a 401k for my small business?” it’s time to get answers. Read on to learn all about this type of plan and how to choose the right one for you and your business.

Should You Offer a Small Business 401(k) Plan?

business 401k

Reevaluating your small business financial plan to include a business 401k plan is no simple feat. Before getting into providers, the first decision you need to make is whether or not you should offer a small business 401k. If you’re wondering how to start a 401k for your small business, it’s important to take the time to research different plans, what they offer, and their fees. Yes, this will take time and effort but all in all, you’ll benefit whether you are a one-person show or home to 450 employees. Here are just a few of the most common benefits of setting up a retirement plan:

  • Offering a small business retirement plan will help you attract and retain employees
  • As the owner, you can benefit from tax-deductible employer contributions
  • Employees can enjoy tax-deferred growth on earnings
  • Taking part in a plan helps encourage savings for retirement regularly

Benefits are different for independent contractors versus employees (or 1099 vs. W2 workers). With different contracts, you will be able to provide different levels of benefits.

Do you qualify?

Any size business can offer a 401k plan.

However, based on the type of plan you choose, you may legally have to pass nondiscrimination tests each year (also known as ADP tests) to continue to offer that plan. Not all plans require this, so it is important to find out if the plan you are researching is exempt or not.

How Much Does a Business 401(k) Cost for Employers?

Starting up a 401k for your small business does carry a cost. Therefore, as an employer, it is important to understand the how and why behind these. After all, these will become your overhead costs once implemented. Here are a few of the costs to be prepared for:

  • A one-time initial setup fee that covers setting up the plan and educating employees about the plan. This can run anywhere between $500-$2,000 but keep in mind that there is a tax credit for small businesses with less than 100 workers.
  • Administration fees: Managing the plan on a day-to-day basis is a lot of work. Consequently, most companies hire a third party to maintain the plan. These companies charge around $1000-$3000 per year and provide valuable services by taking care of annual non-discrimination testing, completing necessary forms to keep the plan running smoothly, plan information materials, providing statements, and much more.
  • Employer matching: This is optional, but it is an attractive feature for employees.

Other fees to look out for include:

  • Rollover fees
  • Plan termination fees
  • Plan amendment fees
  • Payroll and retirement plan integration fees

The cost for employees

how to start a 401k for my small business

The vast majority of 401k plans use ETFs or mutual funds for investments. Investment companies manage these funds and charge an annual fee for their services to investors.

Since your employees are the investors here, looking for a provider that offers low-fee funds such as index funds for plan participants will be crucial. Your employees can save a large sum of money over time by simply investing in low-cost funds as part of their retirement plan.

Investment companies’ annual fees are deducted from the funds’ returns. It can be easy for employees to not see the difference unless they’re aware of the fees from the beginning.

Here are other fees that will affect your employees’ bottom line:

  • Recurring plan and participant fees
  • Recurring investment advisor fees
  • Administrative service fees
  • Recordkeeping fees

How to Start a 401(k) for My Small Business

Are you still wondering about the details of starting a 401k for your small business? Setting up a small business 401k plan is not as complicated as it may appear. The IRS has outlined a few basic steps to help make the process easier.

1. Research small business 401(k) investment options

The first step is to write down a plan. The priority is to find a small business 401k plan that will become a part of this document. There are many options to choose from, but the 3 most popular types are:

  • SIMPLE (Savings Incentive Match Plan for Employees): If you run a company with less than 100 employees, this plan will require you to contribute to your employees’ 401k accounts. Employees must invest immediately, and with this plan, do not have to take non-discriminatory tests.
  • Traditional 401k: This type of plan offers employers a good deal of flexibility. You can choose to contribute to employee plans, not contribute, or match up to a certain amount of the wages employees defer. These types of plans do require nondiscrimination testing each year.
  • Safe Harbor: This type of plan requires the employer to contribute a larger amount to their employee’s plans than what their employees choose to defer. This typically starts at 3% of the employee’s taxable wages. By making this commitment, the plan becomes exempt from nondiscrimination testing. Employees must be vested immediately.

2. Determine your business 401(k) provider

Once you have selected which plan is right for you for your business 401k, you will need to find a 401k provider that can give you the most value for your money. Some examples of notable companies that offer small business 401k plans are:

  • ADP
  • American Funds
  • Betterment for Business
  • Charles Schwab Index Advantage
  • Edward Jones

3. Consider matching options

starting up a small business 401k

When you offer a business 401k, employer matching will undoubtedly come up. When setting up a 401k for a small business, employee matching can be a great source of motivation for employees. While businesses aren’t required to match employee investments, it’s still a good idea. Matching can increase employee satisfaction and, since they are deductible, drive down a business’s taxes too.

If you want to offer a matching program but are afraid some employees will just take the money and run, consider a vesting schedule. With a vesting schedule, employees can’t take the employer’s contributions until they have participated in the retirement plan for a certain length of time.

4. Create a plan for your staff

If you decide to hire a plan administrator, they will assist you in creating a plan for your staff. When business owners find themselves asking how to start a 401k for their small business, writing their thoughts down will prove to be a tremendous asset so that plan details and goals will be clear for all.

When setting up a 401k for a small business, this document will help to explain the day-to-day operations. Again, the plan administrator is there to assist in creating this foundational document. This document will also include information on where the plan assets will be kept, record-keeping information, and provide plan information to participants.

5. Keep up to date with any changes or offerings

If any changes are needed to be made to a retirement plan, addendums can be made. Decidedly, it will be important as an employer to ensure staff is made aware of plan details and to ask for feedback periodically.

Final Thoughts

As you can see, setting up a 401k for a small business is not complicated, but it will require some initial setup costs, research, and ideally a great team of third-party companies to help make it all possible.

With the majority of small businesses not offering 401k plans, this is one great way to not only stand out amongst the competition but to attract and retain strong employees. While the hours of hard work will be a bit daunting at first, the process is quite simple and be worth it in the long run. Best of luck in your search for the perfect plan for you and your employees!