Establishing a 401(k) Plan

How to Set Up a 401(k) Plan

How do I set up a 401(k) plan? Are there 401(k) plans for small businesses? This article explains how you can establish a 401(k) plan for your employees.

Next to health insurance, a retirement plan is one of the most important things you can do to attract and retain top-notch employees. A 401(k) plan is a relatively simple and effective way for your company to help meet your employees' retirement needs.

401k Plans

Setting up a 401(k) plan for your business may not be as difficult as it sounds. One of the first decisions you need to make is whether you will set up the plan yourself or hire a professional (a bank, mutual fund provider, or insurance company) to help you get your plan off the ground.

Most small business owners find the most cost-efficient way to establish and manage a 401(k) plan is to utilize the services of an outside professional. However, as your business grows you may want to consider transitioning to an in-house program.

If you decide to set the plan up yourself, you will need to do at least four things:

(1) Adopt a written plan

The written plan defines the type of 401(k) program your business will offer as well as the terms under which your employees can contribute. The primary purpose of the written plan is to ensure that your retirement program is equitable and conforms to legal requirements.

There are several different types of 401(k) plans out there, but with a little research you can easily find the one that is right for you. Some of the things that need to be considered in the plan include the amount the employee is allowed to contribute and how match of their contribution will be matched by you - their employer.

(2) Arrange a trust fund for the plan's assets

The money invested by and on behalf of your employees needs to be kept in a trust fund. This is a security measure that safeguards your business' retirement assets from mysteriously disappearing, leaving you and your employees high and dry in your old age. Trust funds require trustees to oversee and manage them, so you will need to choose people you trust to fill this role.

(3) Develop a record-keeping system

Once you and your employees begin to contribute to your 401(k) plan, you'll need to develop a way to keep track of contributions, earnings, expenses, and distributions. The record-keeping system will be supervised and/or maintained by a plan administrator.

(4) Provide plan information to your employees

All of your effort in establishing a 401(k) plan will be for nothing unless you communicate the details of the plan to your employees. The easiest way to accomplish this is to compile an information folder that is distributed to new employees. The folder must contain an SPD, or Summary Plan Description. Although your employees may not all be eligible to contribute to the plan, at least you will have covered your bases and demonstrated due diligence in keeping them informed about the options that are available to them.

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