How to Set Up a 401(k) Plan For Your Business
posted by Fisher 401(k) October 27, 2020 Updated
401(k) plans are one of the best benefits you can offer your employees—and they’re a staple if you want to be successful in recruiting and retaining top talent.
With the decreased use of pensions and the limitations of Social Security, many working people have to partially or completely fund their own retirement savings. You can help your employees better prepare for their financial future by starting a 401(k) plan with features that meets their needs.
But, not all 401(k) plans or service are the same. Over 81% of workers would agree that, all else being equal, the retirement benefits offered by a company would have a major impact on their decision to take a new position.1 That's just one of the reasons getting it right is important. In addition, retirement plans can offer business owners tax-shelter benefits they can't otherwise get. Get all the details here on how to start a 401(k), the benefits of a 401(k) and more.
How to Start a 401(k) Plan for Your Small Business
There are 3 key steps to starting a 401(k): Choose your partners, set your goals, and start saving.
1. FIND A GOOD ADVISER
The first step to setting up your retirement plan is to hire your retirement plan partners. It's easiest when you choose your adviser first because they can help you with the rest. Since many financial institutions, payroll providers, insurance brokers, and wealth management firms all offer retirement support, small businesses will have advisers galore to compare. But what distinguishes a great adviser from a good one? What makes an adviser stand out is how they help you when it comes to plan design, how much administration they take on, what their fees are and how they charge the fees, and how well you and your employees are proactively supported.
Once you’ve chosen an adviser, they will help you with the rest. This includes choosing the other service providers you’ll need to keep your plan in good working order.
2. IDENTIFY YOUR GOALS FOR THE 401(K)
Before you begin to build your retirement plan, it’s a good opportunity to take a step back and think about your specific goals for it, including:
- You’d like to save more for retirement: As a business owner, you’re interested in saving more money, and you know that a 401(k) can help you save more for retirement—up to $61,000 in 2022 and when paired with a Cash Balance plan, up to $240,000—all tax-deferred.*
- You’d like to pay less in taxes: Your business has become more and more profitable, and you know that a 401(k) can help you lower your taxable income with deductible employer contributions and plan expenses.
- You’d like to help your employees save: You want to help your employees prepare for retirement when the time comes.
- You’d like to increase employee retention: You need to attract and retain talent, and good 401(k) benefits can mean landing your next key employee—or losing them to the competition.
*Assumes annual 401(k) maximum contribution of $20,500; $6,500 catch up; $37,500 profit sharing (for 2022)
3. SETTING UP A 401(K) PLAN
Finally, here’s the nitty-gritty left to do to start your company’s retirement plan:
1. Collect employee data. In order to make sure employees qualify for enrollment in the new plan, you’ll need to prepare an accurate census of employee information, including names, birth dates, hiring dates, salary information, and more.
2. Identify a Plan Manager. You as the employer will manage the plan, some small businesses may have another employee, like an HR manager, be named as the official “Plan Manager” for your plan. In addition to the business owner acting as a fiduciary, the person chosen as Plan Manager may also have fiduciary responsibilities. It’ll be their job to work with your adviser and other providers to facilitate plan administration.
3. Determine the new plan’s start date. You will also need to decide when you want to roll out the plan and allow employees to enroll. Often, you can set up your plan to start by the following month's payroll—which means employees (and you) will be able to start saving for retirement into the plan.
4. Set up payroll. Finally, you’ll need to make sure that your payroll system is set up to handle employee deferrals according to your plan design. Fisher specifically helps our clients with this step as it can be tricky depending on your payroll provider.
The Benefits of Offering a 401(k) Plan
No matter your unique goals for starting your new retirement plan, a 401(k) offers many benefits to employers and employees alike, including:
Increased Tax-Sheltered Savings for Owners
Business owners interested in putting away more tax-sheltered income for retirement can benefit greatly from a 401(k) plan. Higher contribution maximums than an IRA allow you to defer a higher amount of your salary, and plan features like Cash Balance plans have the potential to increase your overall saving limit up to $240,000 per year.
Good retirement benefits can make or break your ability to attract key employees and hold onto the ones you have. After all, 60% of workers would switch jobs for a better retirement plan.1
Helping Employees Save for Retirement
A retirement plan like a 401(k) offers flexible options for employer contributions to incentivize employee saving. Combined with the educational support from your adviser, it means you can help your employees retire comfortably when the time comes.
401(k) Plan Tax Benefits
In addition to the many benefits listed above, a 401(k) plan offers several tax benefits to employers and their employees, including:
- Startup Credit: Claim a “Retirement Plans Startup Costs” tax credit of 50% of your set up and upkeep costs up to a minimum of $500 and a maximum of $250 times the number of non-highly compensated employees in the plan (up to $5,000)—for the first three years of the plan.2
- Deductible Expenses: You can also receive business tax benefits for contributing or matching your employees’ contributions. If you choose to pay for any of the plan’s management fees as the employer, you can also use those expenses to reduce your taxable income.
- Reduced Taxable Income: If you and your employees participate in the plan, the contributions will be pre-tax. Putting away money into a 401(k) account can reduce your and your employees’ annual taxable income.
Types of 401(k) Plans
Part of building a customized retirement plan for your business means taking a close look at the many types of retirement plans available. You can compare your options between a 401(k), SEP IRA, Solo(k), and SIMPLE IRA with our interactive plan selector tool and our comparison chart.
Take the Guesswork Out of Small Business Retirement Plans with Fisher Investments
Starting a retirement plan doesn't have to be hard. Just look at some of the ways our solution takes on the heavy lifting:
- Hassle-free plan administration
- With our transparent and fair pricing, we make offering a retirement plan an affordable choice
- In just three steps, we help you build a plan that’s right for your business—getting started is easy and fast
Ready to get your new small business retirement plan off the ground in time for the New Year? Contact us today to speak with an experienced retirement specialist and start saving by next month’s payroll.
1 Source: 19th Annual Transamerica Center for Retirement Survey
2 Certain restrictions apply. Please visit https://www.irs.gov/Retirement-Plans/Retirement-Plans-Startup-Costs-Tax-Credit for more information.
How to Start a Retirement Plan Toolkit
Starting a retirement plan is exciting. It’s one of the most powerful savings tools the government gives business owners and employees. Complete the form below to download the small business retirement plan toolkit. Inside has important How-To Information, Tools to help you along the way, and Checklists.