I recently posted about retirement plan options for small businesses and the self-employed.  Now let’s talk about starting a 401(k) Plan as another option.  Remember, how much you want to save and your willingness to manage the complexity are the main drivers of your decision for choosing a retirement plan.

Traditional 401(k) Plans are available to employers with one or more employees.  They allow for a high level of salary deferral by employees and the opportunity for employer contributions.

How do you know if a 401(k) Plan is the best choice for your business?  First, you must be serious about providing a benefit to your employees and willing to take on the fiduciary responsibility of sponsoring a plan.  A 401(k) Plan functions much like a separate entity and is sponsored by the business.  The plan will require:

  • A recordkeeper,
  • A Third Party Administrator (TPA) and
  • An Investment Advisor to support the administrative work.

You also may need to consult an ERISA attorney.  Each of these providers will charge fees, some of which can be borne by the plan and some that will have to be paid out of pocket, at least initially.

Obviously, starting a 401(k) Plan is not to be taken lightly.

So, why start a 401(k) in the first place?  In part, because you will be providing a benefit that can be helpful in recruiting and retaining employees.  For 2021, employees saving in a 401(k) Plan can save up to $19,500 ($26,000 if over 50 years of age) tax deferred or through a Roth with after tax money.  The employer can contribute to employees’ accounts through matching and profit sharing pushing the maximum from all sources for 2021 to $58,000 ($64,500 if over 50).

There are more details and considerations you would need to make, but the bottom line is that a 401(k) Plan can be a powerful benefit for employees including owners-employees, but they are complex and require a commitment for the long-term.  If you were serious about starting a 401(k) Plan, your first step would be to learn more.  A Registered Investor Advisor firm that specializes in advising 401(k) Plans would be a good place to start.  They serve as fiduciaries to their clients.  Remember, a plan sponsor takes on a fiduciary responsibility to administer the plan in the best interest of the employees saving in the plan.

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