Types of 401(k) Plan Options

Customize your company's retirement plan

If you answer any of these questions with a “yes” check out the many small business 401(k) options available to upgrade your 401(k) to work better for you and your employees.

  • Do you want to be able to maximize your personal savings?
  • Do you want to attract and retain employees with key benefits?
  • Do you want more retirement tax strategies?
  • Has your 401(k) plan failed compliance testing in the past?
  • Are you concerned about your employees' retirement success?

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Customize your Employer Sponsored Retirement Plan with these Options

There are many ways to customize a retirement plan so it can meet your individual and business needs. Take a look at some of the most popular types of 401(k) options.

Employer Match

Employer Match

Encourage your employees to defer more money by offering a match. Consider using a vesting schedule to encourage employee retention.

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401k Auto Enrollment

Auto Enrollment

Auto enrollment has been shown to increase participation rates among staff and better prepare your employees for retirement.

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401k Safe harbor

Safe Harbor

Pass most compliance testing with this option.

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401k Profit Sharing

Profit Sharing

Every year, based on your business's success, you can give your employees a retirement bonus through a Profit Sharing Plan.

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401k Business Cash Balance Plan

Cash Balance

Reduce personal taxable income and accelerate savings. Cash Balance is designed for high-net-worth owners of small businesses with steady revenue.

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Business 401k roth plan

Roth 401(k)

A Roth 401(k) option allows you and your employees to contribute post-tax earnings toward retirement.

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401(k) Plan Options Comparison Chart

This chart breaks down some of the most popular 401(k) plan options employers choose. Take a look at the three categories: Why you want it, Considerations, and When is it right. Our Retirement Plan Specialists can walk you through the ins and outs of each of these options as well as others you may want to consider for your employer sponsored retirement plan.

Employer Match
Auto Enrollment
Safe Harbor
Profit Sharing
Cash Balance
Roth
Why You Want It
Employer Match

When your employees defer a percentage of their income, the company can match it and create parameters to match the deferral amount.

Auto Enrollment

Auto enroll employees into the 401(k) plan as soon as they qualify.

Safe Harbor

A provision added to your 401(k) plan that gives you a pass on most compliance testing.

Profit Sharing

Most flexible way for employers to defer retirement dollars to their employees.

Cash Balance

Can help business owners realize tax deductions and savings rates up to 4x more than with a stand-alone 401(k) plan.*

Roth

Roth accounts are attractive to younger employees and high-earning employees. 

Considerations
Employer Match

You can set the matching amount at a %, (i.e. match the first 3%). And you can set a vesting schedule — meaning that the 3% match vests after several years of employment.

Auto Enrollment

Set a base deferral rate for employees upon enrollment (3% for example) with an option to opt out whenever they choose.

Safe Harbor

Requires an annual employer contribution that is immediately 100% vested.

Profit Sharing

As defined in the plan document, this can be a discretionary contribution each year distributed to your eligible employees. There are several ways to allocate those dollars.

Cash Balance

Reduce personal taxable income and accelerate savings. All assets in the cash balance plan are pooled and come from the employer.

Roth

A Roth costs very little, if anything, to add on to your existing 401(k) plan. 

When Is It Right?
Employer Match

Increases employee engagement levels. Employees appreciate when companies invest in their retirement.

Auto Enrollment

Improves employee retirement readiness. If your employees are unlikely to enroll on their own they could lose out on valuable compound growth opportunities.

Safe Harbor

With Safe Harbor, the company 401(k) plan will have reduced testing requirements, and employees benefit too with an annual 401(k) contribution from their employer.

Profit Sharing

Not only are you sharing your business success with your employees, but you control how much is contributed each year—less in lean years and more in good years.

Cash Balance

Adding a Cash Balance Plan reduces the business owner's taxable income and increases the owner's savings rate, and benefits employees too with an employer contribution into their 401(k).

Roth

Add a Roth option to your 401(k) plan anytime to give your employees different tax strategies in retirement.

*Based on 2019 contribution limits and assumes a 37% tax; varies by state. Taxes are deferred.

A Traditional 401(k) Plan

A traditional 401(k) plan—sometimes referred to as a defined contribution plan—is a common retirement plan type many small businesses choose. The flexibility of features for a traditional 401(k) is the main reason businesses choose this type of employer-sponsored retirement plan. They’re also great for diversifying tax savings strategies, which is one of the many ways a 401(k) can be designed with unique business needs in mind.

Pros:

  • Business owners may put away up to $56,000 per year toward retirement, or $62,000 for those 50 and older, for a 401(k) with a profit sharing feature. While the individual maximum is $19,000, ($25,000 for those 50 and older) adding a profit sharing feature allows for an additional $37,000 in savings.
  • You can design your 401(k) to drive employee retention, employee participation in the plan, pass most compliance testing, expand business tax savings options, and share profits with employees. Features such as safe harbor, profit sharing, or cash balance can be added to make the plan more competitive for attracting high-end talent.
  • Tax credits of up to $500 for each of the first three years of the plan are available to business owners to help offset administrative costs.

Cons:

  • Most 401(k) plans will undergo yearly testing by the IRS and/or Department of Labor to make sure that the plan is fair to all employees.
  • More partners are required to administer a 401(k), as they are more complex; business owners will need to hire a third-party administrator and recordkeeper for their plans, thus making plan administration more costly. However, some 401(k) service providers may offer a representative that helps coordinate those relationships to make life simpler for the business owner.
  • You’ll have to set up a plan document for your 401(k), and regularly file paperwork related to it. Depending on who you choose as your service provider, they may share or take on some of your fiduciary responsibilities.

Takeaway:

If you’re looking to maximize your tax benefits and take advantage of higher contribution limits, a 401(k) will allow you to take advantage of many savings features.

More Employer Sponsored Retirement Plan Options

If your business has 100 employees or fewer, there are options outside of a traditional 401(k) that may better suit the needs of your business and employees.

Simplified Employee Pension Plan - SEP IRA

SEP IRAs are easy retirement plans to set up, and are best suited for people who are self-employed or small businesses with only a handful of employees. Only employers are allowed to make contributions, which can reduce taxes as a business expense. Those contributions go to a traditional IRA held in the employee’s name, and contributions can be as much as 25% of an employee’s income (or up to $56,000, whichever is less).

Pros:

  • Because it’s IRA-based, it’s cheap to start. There is no recordkeeper or third party administrator to pay, so administration costs are low.
  • There is minimal administrative burden to maintaining your plan—including no IRS Form 5500 to fill out, no compliance testing, and no payroll deductions.
  • The business owner may put away up to $56,000 per year toward retirement, or up to 25% of their earnings (whichever is less).

Cons:

  • Owners must contribute to their employees’ accounts at the same rate that they contribute to their own. So if a business owner is contributing 20% of their own income, they must also contribute 20% of each employee’s income to their own accounts. Depending on the number of employees a business owner has, this can get expensive.
  • Employees aren’t allowed to contribute their own savings to a SEP, as contributions are allowed only by the business owner(s). Therefore, the business owner must fund their employees’ accounts.

Savings Incentive Match Plan for Employees - SIMPLE IRA

SIMPLE IRAs, along with SEP IRAs, are among the easiest retirement plans to set up and run. SIMPLE IRAs have similar benefits to a SEP IRA, with one key difference: Employees can contribute to them. This makes it appealing to employees looking to contribute their own money, and business owners who don’t want to hire someone to run the plan or spend a lot of time dealing with government non-discrimination testing or plan design. Businesses with SIMPLE IRAs do not have vesting schedules for their employees, and aren’t required to report taxes at the plan level—but they are required to make employee contributions.

Pros:

  • Like a SEP IRA, it’s cheap, and there are no recordkeeper or TPA fees.
  • No IRS reporting, compliance testing, or other administrative maintenance needed.
  • Employees are allowed to contribute.

Cons:

  • Contributions are limited to only $13,000 per person per year; business owners looking to max out their retirement contributions would be limited.
  • Owners are required to offer their employees either a 3% matching contribution, or a 2% salary-based contribution. This means that even employees who don’t contribute to their retirement would still receive a contribution equal to 2% of their yearly pay.
  • Savings in a SIMPLE IRA account cannot be rolled into another account until the SIMPLE has been established for at least two years.
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