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How to Set Up a 401(k) Plan: A Step-by-Step Walkthrough for Employers

How to Set Up a 401(k) Plan: A Step-by-Step Walkthrough for Employers

Considering setting up a 401(k) plan for your business? Great choice! 401(k) plans are one of the most popular retirement savings vehicles available today, and for good reason. They are a powerful addition to your benefits package that can significantly enhance your company's appeal in the competitive job market, making it easier to attract and retain top talent. Plus, it demonstrates a commitment to your employees' long-term well-being and financial security, which can boost morale and productivity.

But…where do you start? In this blog, we’ll walk you through the basics of choosing and setting up a 401(k) plan for your company—one that aligns with your business objectives and supports your team's financial future.

What is a 401(k)?

A 401(k) plan is a tax-advantaged retirement plan sponsored by employers. Both employees and employers can make contributions. Employees can choose pre-tax contributions to reduce their taxable income now and pay taxes upon withdrawal, or, if available for their plan, Roth contributions, which are taxed upfront but withdrawn tax-free.

Employer contributions can come in various forms:

Matching ContributionsNon-Elective ContributionsProfit-Sharing Contributions
Employers match a portion of employee contributions, typically up to a certain percentage of their salary.Fixed contributions made to all eligible employees, independent of their own contributions.Discretionary employer contributions based on company profits.

Generally, savers can withdraw funds from their 401(k) without penalty after reaching age 59½. Early withdrawals are subject to taxes and penalties, although there are exceptions for certain hardship situations.

How to Set Up a 401(k) Plan

Ready to get started? Here are 5 steps you can take to set up a 401(k) plan for your business:

Step 1: Select a Plan Provider

Your first step when setting up a retirement plan is to choose a 401(k) plan provider. Start by researching and comparing various providers, focusing on key aspects such as costs, range of services, investment options, and the level of administrative support they offer. Review client testimonials, ask for referrals from other business owners, and consult industry publications. Be sure to consider the provider's reputation and the quality of their customer service. These factors can significantly impact your plan's effectiveness and your experience managing it.

Once you have a shortlist of potential providers, request proposals so that you can compare the costs and fees. You can also schedule introductory calls with providers to clarify any questions and get a feel for their level of service and expertise. If you have a financial advisor, it’s also helpful to involve them in the decision-making process.

Step 2: Choose a Plan Design

Once you’ve chosen a provider, your next step is to consider your goals for your retirement plan. Are you looking for flexibility? Or is ease of administration your top priority?

Your goals can help guide you when choosing plan features. For example, you can add a profit-sharing component to your plan, which allows you to make discretionary contributions to your employees' retirement accounts and provides more flexibility. A Safe Harbor 401(k) plan, on the other hand, is designed to automatically satisfy non-discrimination tests and can help simplify plan administration.

To help you navigate these options and more, Vestwell offers our clients a streamlined Plan Design Questionnaire. This tool allows us to get to the core of your unique needs and objectives. Using straightforward language and avoiding industry jargon, the questionnaire asks about your business and your goals.

We analyze your responses to propose an optimal plan design that closely aligns with your company’s specific needs and objectives. If you choose Vestwell as your provider, your Plan Design Consultant will walk you through your options and help you decide on eligibility, contributions, vesting, and more.

Step 3: Review Your Plan Document

A 401(k) plan document is a formal written legal document that outlines the specific terms and rules of a 401(k) retirement plan. It serves as the foundation for how the plan is operated and administered. Vestwell creates plan documents for all of our clients.

The plan document includes detailed information on a variety of aspects, such as:

  • Eligibility Requirements: Specifies who is eligible to participate in the 401(k) plan, including age and service criteria.
  • Contribution Limits and Rules: Details the contribution limits for both employees and employers, along with the rules for making these contributions.
  • Vesting Schedule: Explains the schedule by which employees gain ownership of employer contributions to their 401(k) accounts.
  • Distribution Rules: Outlines when and how savers can withdraw money from the plan, including provisions for loans and hardship withdrawals.
  • Fiduciary Responsibilities: Defines the roles and responsibilities of the plan's fiduciaries, who are responsible for managing the plan and its assets.

The plan document is an important part of making a 401(k) plan run smoothly.

Step 4: Set Up Payroll

The next step involves setting up payroll. You will need to collect and share your payroll information with your 401(k) service provider. If your provider offers payroll integration capabilities, then contributions, elections, and other payroll-related transactions will be automated.

Vestwell simplifies the payroll setup process with our online task tracker. This tool allows you to add details about your payroll system, set up pay schedules, and designate a payroll administrator. This centralized approach ensures that your payroll information is inputted accurately and easy to manage.

Step 5: Provide Plan Information to Eligible Employees

Once your 401(k) plan is ready to go, the next step is to communicate the plan details to your eligible employees. This involves distributing a document called the Summary Plan Description (SPD). The SPD outlines the rights, benefits, and responsibilities of the participating employees within the plan. It includes detailed information on the plan's features, such as contribution limits, vesting schedules, withdrawal and loan provisions, and other key aspects of the plan.

Vestwell streamlines the communication process by sending out registration emails directly to all eligible employees. These emails provide employees with direct access to register for the 401(k) plan and start managing their contributions. If any emails are undeliverable, we’ll let you know so that you can update the email address or provide paper copies of the plan details.

You’re Ready to Go Live!

Congratulations—your 401(k) plan is live! This milestone marks the beginning of a new phase in your company’s journey toward ensuring a secure financial future for your employees. With the plan active, your eligible employees can start contributing and growing their retirement savings.

As you transition into this new phase, Vestwell’s onboarding team will introduce you to the employer services team, your primary point of contact moving forward. They are equipped to assist you with any questions or needs that arise as you manage your plan. Their expertise in plan administration and ongoing support will help you navigate the day-to-day operations of your 401(k) plan seamlessly.

Ready to set up a 401(k) plan for your business?

Conclusion

A retirement plan is a powerful addition to your benefits package. By offering a 401(k) plan, you're not just providing a retirement savings vehicle; you're investing in your team's long-term wellbeing. It's a decision that can significantly improve your employees' retirement outcomes and strengthen your company's culture and loyalty.

At Vestwell, our commitment to our clients goes beyond the initial onboarding period. We offer ongoing resources and support to help make sure your plan remains effective and compliant. Reach out to us today to learn more about how Vestwell can help you set up and manage a 401(k) plan that’s right for your business. Click here to get started.