How to Set Up a 401(k) Plan for Your Business

Although 401(k) plans may seem complicated at first glance, purchasing and setting up a plan can be an easy, straightforward process. We've helped thousands of businesses get up and running with their first plans and are happy to guide you.

To get you started, here are six steps you can take when setting up your 401(k) plan. And remember, we're here for you―just get in touch!


Select the Plan Design that Best Fits Your Needs.

A 401(k) offers a lot of flexibility, so it's important to determine the core plan type that best aligns with your particular business needs. This way you can offer the biggest benefits and savings for you and your employees and still keep your costs low. There are four main plan designs:

1. Solo 401(k)-

designed specifically for the self-employed or owner-only plans (not an option for those with full-time employees).

2. Safe Harbor 401(k)-

enables employers and key employees contribute up to the maximum of 401(k) limits and automatically satisfies IRS tests in exchange for providing a matching contribution to employee accounts.

3. Traditional 401(k)-

gives employers flexibility including whether to provide a match or not, and the option to use a vesting schedule for employer contributions.

4. Advanced Profit Sharing-

can allow employers to potentially segment employees and reward them differently with employer contributions based on meeting specific requirements.

To learn more specifics about different plan types, take a look at the best plan design for your business.


Pick a Provider with Low Fund Expenses and Purchase Your Plan.

A one-time charge for setup and a monthly or quarterly administration charge is typical for most any business starting a plan. Know that these costs can be nominal and will typically be tax deductible for your business.

The most important costs to pay attention to are the investment and fund expenses. These expenses are the costs every employee pays for contributing and investing in the funds offered in your plan. Although the differences between investment options and expenses may seem insignificant, these costs compound over time, so they have the potential to significantly diminish your returns in the end. Even a difference of just 1% in expenses could add up to hundreds of thousands of lost retirement savings for each employee over time. This is the big reason we advocate to keep your fund expense ratios and any other investment expense that may be added to be less than 1% all-in.

chart paying one percent

This example shows the effect that expenses can have on your 401(k) retirement account over a career of 40 years by comparing the costs of paying 1% versus 2% on investments and how savings may accumulate. It assumes the investments have a fixed annual 7% return before expenses with no distribution or tax considerations and does not imply future returns. The example assumes each employee has a salary of $75,000 in year one and receives a 3% merit raise each year on-going. In addition, the employee contributes 5% of her salary each year and receives a 3% of salary company matching contribution.

There are providers that specialize in serving small businesses and don’t charge more than 1%, so there’s no reason to sign up with one that does. You may also want to sign up with a company like ShareBuilder 401k that manages your company’s investment roster for you. This not only saves you the time and energy you would need to spend picking and reviewing your 401(k) plan investment roster ongoing, but it also reduces some liabilities involved in providing a 401(k).


Select Features and Service Support that Put Your Plan to Work for You.

Key features that most plans include are: a Roth 401(k) option, employee automatic enrollment, employee eligibility requirements, and specifics around any employer matching contributions. You will also want to ensure your provider has call center support for employees and a separate dedicated line for you and/or those managing your plan (plan sponsors) at your company. Our team is on hand during business hours to help you navigate your options when determining the specifics of your plan and to help ensure that you and your employees are able to fully utilize all the features of your plan. Our online purchase experience helps make it simple to purchase and set up your plan. And of course, our plans are fully supported with customer care and 401(k) professionals to answer questions ongoing.


Roll Out Your Plan to Employees.

Once you purchase your plan and select the features, your 401(k) will be ready to roll out to your employees. Most 401(k) providers will provide you with an email to send to employees that announces the details of the plan. We work with you to schedule and host an online kick-off and share videos and guides to help your employees get off on the right foot and make sound decisions ongoing.


Set up Automatic Contributions and Payroll.

We can show you or your office administrator easy ways to update your payroll system with 401(k) contributions, so it only takes a few minutes each pay period to manage your company's 401(k) plan. Your employee announcement needs to contain instructions for how employees can select how much of their salary they'd like to contribute from each paycheck, choose the funds to invest in, and determine a beneficiary. The kick-off meeting mentioned above can explain these steps and answer common questions.

set up automatic contributions

Leverage Your Plan at Tax Time to Keep Costs in Check.

Your 401(k) program can make you eligible for a number of tax credits and deductions. For businesses with employees, offering a 401(k) plan for the first time qualifies your business to receive up to $5,000 in tax credits each year for the first three years of the plan to help offset setup and recordkeeping costs. Also, if you decide to provide a match or a profit share to your employees, those expenses are typically tax deductible. And, of course, your own personal contributions to your 401(k) account can lower your personal taxes for the year too.

Once you've installed your 401(k) plan, it's a good idea to check up on your account periodically and ensure your portfolio still aligns with your goals. As a business owner, you'll (or a person you've appointed on your team) also need to complete an annual year-end checklist with your provider to ensure your plan is compliant with 401(k) rules. Other than that, your plan will run in a pretty automated fashion and can help you and your employees get on track for retirement.