So, you’re thinking about adding 401(k) benefits for you and your team. But what do you need to know before you jump in? Well, like most any business service, there are some insights that can help make the whole process much easier. Here are the three big areas that with a little understanding you can quickly ready to launch a 401(k) plan for your company.
1. 401(k) Plan Design – What Is It?
Think of 401(k) plan design as the various products you can choose from to meet your company’s needs. 401(k) plans are highly flexible. The key terms to know for businesses with employees are Safe Harbor and Traditional. The Safe Harbor is popular for many small businesses as by providing an immediately vesting match, owners and highly compensated employees can contribute to the limit. However, maybe you want a vesting schedule, don’t want to provide a match at all to start, or a different match than what’s required for Safe Harbor. Well then, a Traditional design is the way to go.
For more insights, read What 401(k) Plan Design Is Best for Your Business?
2. What Kind of Service Do I Need?
You might think services are pretty much the same from various 401(k) providers. It can vary quite a bit. Some are highly digital but are not good to rely on for picking up the phone for your employee questions and may not be capable to handle your employer admin questions either. Some have pretty good service, but a poor digital experience. Ideally, you want a provider that has an easy to navigate web experience to manage all key functions, that is backed with a customer service team that has a service level standard for picking up the phone and answering emails. 80% of calls answered in 20 seconds or less is something you probably want. Emails answered same day with at least a status. Training for employees via webinar or perhaps in-person.
For a grid that lays this out and in greater depth, give this a read: What 401(k) Plan Services Your Business Will Need and Value?
3. What Are the Costs to Provide 401(k) Benefits?
Many businesses get fixated on costs when starting a 401(k) plan. This is important. The good news is that any size business can find a pretty darn affordable 401(k) plan – at least from what is out of pocket for the business. For example, a business of 10 people can run a plan for <$100 per month. Plus, receive tax credits and deductions that can cut that in half. Oh, and if you provide a company match, it’s often fully deductible for the business, so it’s more of a cash flow consideration.
However, the big cost to really understand is the fund expense ratios and investment management expenses (aka. asset management charge). These impact everyone, and most importantly, these can impact how much you will have saved for retirement. Over a career, even paying 1% more can cost you hundreds of thousands of dollars in your personal 401(k) account over a 40-year career. If all-in, your fund and management expenses are under 1%, you are in pretty good spot. Over 1%, there simply is no need to pay that much. Index funds can make a big difference in ensuring your plan has a high-quality investment line-up and keep your costs in check. Surprisingly, you’ll find an all-index 401(k) fund line-up is still not the norm.
To learn more about indexing and investment costs, read The Advantages of Index Fund Investing.
So those are the main things. A great 401(k) company will educate you along the way and make it as simple as possible to get up and running. Here are a few more resources that may be helpful:
- Top Tax Reasons to Start a 401(k) Plan
- How to Know Your Business Is Ready for a 401(k)?
- How to Set Up a 401(k) Plan for Your Business?
If you need help or have questions, just give us ring.