401k Plan Facts: Small Business 401K Plan Retirement

So many small businesses are offering 401(k) plans to employees that they're becoming regarded as not a perk but part of the standard package, like health insurance or paid vacation.

So many small businesses are offering 401(k) plans to employees that they’re becoming regarded as not a perk but part of the standard package, like health insurance or paid vacation. Small businesses that make no provision for employees’ retirement options aren’t likely to retain top talent for long.

Simply put, a 401(k) plan is a tax-deferred investment and savings plan that acts as a personal pension fund for employees. It allows employees of corporations and private companies to save and invest for their own retirement — as opposed to grandfather’s union pension fund of yore. Under the typical 401(k) plan, employees can contribute up to 10 percent or more of their compensation on a before-tax basis, and their employer will match some of these contributions. Both the contributions and the investment earnings can grow tax-deferred until withdrawal, which is usually retirement, at which time they are taxed as ordinary income.

So what choices do you have, as a small business owner, about what kind of 401(k) plan to establish? A few of the main issues:

Employee and Employer Contributions

You can establish a plan that only provides for elective contributions from employees, or one to which you match contributions. Matching employee contributions is the usual practice, and this option offers a much greater incentive for employees to participate. Be careful — this could become a cost you can’t control, since you can’t determine how much an employee contributes. You can, however, set a percentage limit to your contributions — you’ll match up to three percent, for instance. Sometimes high employee contribution rates create pressure on employers to provide salary increases to cover plan contributions, which should be a consideration.

Investment Practice.

Funds in the account must be invested. Do you want employees making their own investment plans, or following a few chosen alternatives? A wide field of investment choices is attractive, but increases administration time and costs.

Borrowing.

Because 401(k) plans usually charge penalties for early withdrawals, some plans allow employees to borrow against their money, with interest. While this increases the attraction for participation among lower-paid employees, it does increase administrative costs.

Many small businesses simply prefer to work with an administrator, removing much of the hassle of taking care of the plan themselves. If you choose such an option, it’s good to find a plan that provides a comprehensive, cost-effective package with flexibility to adapt to your growing company’s future needs. Popular are “turnkey” packages, such as BankOne’s The One Advantage Retirement Plan, which offers such services as advanced record keeping with daily valuation, trusteeship and reporting, employee communication materials and plan investments.

Try to find a packaged plan that offers a wider range of investment products for employees to choose from, and comprehensive administrative support and record keeping.

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