Starting A 401(k) Plan For Your Business: Everything You Need To Know

Amid the current labor shortage, you may be thinking about offering a 401(k) to incent workers to join or stay at your company. But you may worry about the time and responsibilities involved in starting a plan for workers. Fortunately, it’s easier than you probably expect to begin reaping the benefits of a 401(k) for you and your employees.

Complete Payroll Solutions is a 401(k) provider to thousands of companies. We understand just what’s involved in launching a plan at your company. So you can decide if implementing a retirement plan for your workers is right for you, here we’ll discuss:

  • What’s involved in implementing a 401(k)?
  • How long does it take to set up a 401(k)?
  • What compliance issues do I need to be aware of?
  • How much does it cost to start a 401(k)?

After reading this, you’ll know the process for getting a 401(k) up and running so you can decide if implementing a plan is a good fit for your business.

What’s involved in establishing  a 401(k)?

When you decide to establish a 401(k), you’ll need to take several steps to set up the plan correctly, which you can handle on your own or partner with a third party to complete.

  1. Decide on Plan Design: When you design your plan, you’ll want to determine eligibility, vesting and contribution parameters as well as any employer matching or profit sharing contributions you may decide to offer. For example, while the most common approach to eligibility is to require an employee to complete 12 months of service and be at least 21, you can determine the criteria that works best for your company within IRS parameters.
  2. Select Plan Investment Options: If you’re like most plans, you will act as the fiduciary responsible for selecting the plan’s investment options and monitoring their suitability. Most provide at least three investment choices, but some offer dozens, with the average between 8 and 12 alternatives. These options can be mutual funds or a combination of mutual funds, guaranteed investment contracts (GICs) or stable value funds, company stock, and variable annuities. Some plans offer brokerage accounts, which allow you to select investments from the full range of stocks, bonds, mutual funds, and other types of assets, rather than having to choose among the plan’s alternatives.
  3. Adopt a Plan Document: Next, you’ll need to create a written document that outlines how your plan will operate on a day-to-day basis that’s compliant with IRS rules.
  4. Arrange a Trust for Plan Assets: To ensure your plan’s funds are only used for the benefit of participants, you’ll need to set up a trust to hold and invest the assets and appoint at least one trustee to have responsibility for the activities of the trust, such as handling contributions, plan investments, and distributions.
  5. Hire a Recordkeeper: When you offer a 401(k), you’ll have to maintain records of employee contributions, plan investments, expenses, and distributions. These tasks are handled by a recordkeeper, which is like a bookkeeper for your plan who uses a platform to value your employees’ 401(k) accounts on a daily basis. Your recordkeeper can be either an independent company, fund company that primarily offers investment management services but also has a recordkeeping business, or payroll company that offers a 401(k) as part of their platform.
  6. Provide Plan Information to Employees: Once you establish a plan, you’ll need to notify eligible employees about it, including informing them about who qualifies to participate and how it works. Generally, you’ll provide this information in a Summary Plan Description (SPD). Once an employee joins, they’ll also need to receive regular notifications about their account and notices of any significant changes to the terms of the plan. After you file your annual Form 5500, participants will need to receive a copy of the Summary Annual Report (SAR).
  7. Enroll Employees: Lastly, you’ll need to provide eligible individuals the opportunity to enroll in the plan, set their payroll contributions, and direct the investment of their funds. For most 401(k) plans, there’s an enrollment presentation outlining the plan features and investment options along with instructions on how to enroll. To boost participation in your plan, you may want to consider an automatic enrollment feature that also makes the onboarding process more hassle-free.  

How long does it take to set up a 401(k)?

There’s no set timeframe for establishing a 401(k). It really depends on how long it takes you to complete the steps we just discussed. For many businesses, it typically takes less than 60 days.

One way you can speed and streamline the process is to partner with a 401(k) third party administrator (TPA) to handle a lot of the tasks for you and take some of the responsibility off your plate. As you evaluate potential partners, you’ll want to ask how easy it is to get your plan up and running and what’s required of you during the process.

For example, all providers will ask you to fill out some documents but find out if you will get a dedicated point of contact to help you navigate the tasks involved and ensure you correctly complete the forms.

You’ll also want to ask if they offer automatic enrollment for a hassle-free onboarding process that also increases participation. To make it even easier on your employees, find out whether the interface they’ll be using is simple and intuitive for tasks like monitoring their account or making changes to their salary deferrals.

What compliance issues do I need to be aware of?

Retirement plans like 401(k)s are highly regulated so there’s a lot of requirements to stay on top of. But when it comes to launching your plan, the first thing you’ll need to be aware of once it’s up and running are notice requirements. In particular, you’ll need to make sure employees receive two fairly quickly:

  • Summary Plan Description: As soon as you establish your plan and employees are eligible, they’ll need to receive a Summary Plan Description within 90 days. This document summarizes the major provisions of the governing plan document and other important plan information.
  • Annual Fee Disclosure: Again, within 90 days of becoming plan eligible, employees must receive a notice that describes information about plan fees and investments. Specifically, it must contain two parts: a participant fee disclosure and a comparative charge that reports plan investment information like past performance, expense ratio, and shareholder fees.

Thereafter, on an annual basis, participants must receive quarterly statements and a Summary Annual Report that summarizes certain plan information reported in Form 5500. Employees must receive this within nine months after the close of the plan year.

In addition to notices, you’ll also have to file Form 5500 with the IRS and perform annual nondiscrimination testing if you have a traditional 401(k). These tests are designed to show that you’re not discriminating against lower-income workers in favor of owners or highly compensated employees and include the Actual Deferral Percentage, Actual Contribution Percentage, and Top Heavy tests. With a safe harbor plan, you can avoid this testing.

What is the cost when starting a 401(k)?

When you decide to start a 401(k) plan at your company, you’ll likely have a one-time initial fee to set it up. This will cover activities like setting up the new plan and educating your employees about the plan. 

For these services, you can expect to pay anywhere between $500 to $2,000. Keep in mind that there’s a tax credit for start-up costs for small businesses with less than 100 employees, which the SECURE Act increased to up to $5,000 annually for the first three years. 

At Complete Payroll Solutions, we charge a one-time $500 set-up fee.

Once your plan is up and running, you’ll have ongoing fees as well. These are broken down into employer costs and employee expenses.

  • Employer: To maintain your plan, you’ll pay administrative fees annually. The more complicated the plan design, the higher the fees may be, but you will generally see costs ranging from $750 a year to $3,000. On top of these costs, you’ll pay what’s known as a per-participant fee that will be somewhere in the range of $15 to $60 a year for each person enrolled. At Complete Payroll Solutions, we charge a quarterly plan administration fee of $275 plus $8 per participant.
  • Employee: Your employees may see expenses deducted from their accounts or from the performance of the investments for three categories of fees. Specifically, they may be responsible for recordkeeping fees, mutual fund management fees, and investment advisory fees. All of these are based on a percentage of plan assets.

How to Ease 401(k) Plan Implementation for Your Business

Since there’s a lot to stay on top of when you decide to start a 401(k) at your company, you may decide to outsource administration of your plan to a TPA. If you do, then Complete Payroll Solutions may be a good fit for you if you want a TPA that:

  • Offers creative plan design by using safe harbor, new comparability and age-weighted formulas.
  • Can help you avoid the year-end data crunch. We maintain all the necessary data on our platform to file Form 5500 and complete the compliance testing for the plan, minimizing the data collection work on your end.
  • Offers great value with our administration and recordkeeping services bundled together. 
  • Provides added benefits that make administration even more seamless for you like uploading 401(k) contributions to your product provider.

To learn more about what we can offer you, read our next article on our 401(k) services. If you want to find out the top factors you should consider when selecting a 401(k) provider, read our checklist.

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