Steps to setting up your small business 401(k)

Choose your plan design, investments, services, and costs

One advantage a 401(k) plan offers is the ability to customize it to meet your company’s and employees’ needs. When you consult with your financial professional, you’ll decide on crucial factors such as:

• Whether you’ll retain a traditional design or opt for a safe harbor 401(k) plan¹
• Whether you’ll make Roth 401(k) accounts available
• When employees will become eligible and how vesting will work for any employer contributions
• Whether your company will make contributions, such as matching contributions or profit-sharing contributions, and in which frequency and using which allocation formula
• Whether your plan will accept rollover contributions from employees’ previous 401(k) plans
• If your plan will allow 401(k) loans
• If you’ll use automatic enrollment and auto increase features

You’ll work with your financial professional to choose your plan’s investment lineup, with a combination of options that suits your workforce and meets all your fiduciary requirements. This means offering a wide array of fund choices, from fund managers with proven strength in their categories, and fees that are fair and reasonable.

Often, 401(k) plans for small businesses are supported by a third-party administrator (TPA) and financial professional working closely with a plan recordkeeper. Usually, as part of their services, the recordkeeper will arrange for trust services through a related or partner company.

But regardless of your team’s makeup, your first step in plan setup is to review, and agree to, how your plan will work and much it will cost your business and employees.

Prepare your 401(k) plan document

Your plan document sets forth the plan’s features—such as eligibility, contribution types, and allowable distributions. It also identifies the kind of plan it is, how it works, and certain fiduciary responsibilities on your part. Your TPA and recordkeeper should offer assistance in preparing and maintaining your plan documents.

Finalize your payroll procedures

Depositing employee and employer contributions accurately and in a timely way is critical to a well-run 401(k) plan. TPAs and recordkeepers will make technology and support available for handling your plan-related payroll tasks—and it’s up to you and your team to decide how much of the process you want to handle yourself.

The good news is that leading payroll providers are experienced at integrating 401(k) processing. Better yet, your provider may have a formal relationship with your recordkeeper. If so, consider taking advantage of it.

Communicate the plan to employees

Your initial plan communications will be a mix of three things:

• Required information about plan benefits, rights, features, and fees—including a summary plan description
• Important information that eligible employees need to enroll in your plan—or, if they’re automatically enrolled, how to check and adjust their contribution and investment choices if they choose
• Ongoing access to plan information on your plan website maintained by your recordkeeper

Your TPA and recordkeeper will provide guidance and materials to make all this happen and to help make sure your plan communications meet IRS requirements. They’ll also provide guidance on how to make the most of digital communications by submitting and maintaining employee data files.

Put a reliable support team and structure in place

Through the course of the setup sequence described above, you’ll be introduced to the online resources and the retirement plan professionals responsible for helping to keep your plan running smoothly and in compliance with all the significant rules and regulations.

Your TPA, financial professional, recordkeeper, and specialized consultants may all play a role in providing ongoing service. But it’s important to keep in mind that, as a valued client, you have the right to dependable support from professionals skilled in providing retirement plans for small businesses.  

So, from the beginning, look for partners who are as committed to the success of your 401(k) plan and participants as you are.

1 Safe harbor 401(k) plans require businesses to contribute certain amounts to all participants’ accounts. In return, highly compensated employees may be able to put more of their salary into the plan—making it a more attractive benefit for them.