One of the most powerful perks you can offer your employees is a pension plan, and one of the most popular types is the 401(k). Named after an IRS code section, the 401(k) allows your employees to fund their own retirement through pre-tax contributions. If you can afford it, you can provide matching contributions. Both you and your employees get a tax break for contributing. A good 401(k) plan can:
- Help you attract top talent.
- Allow employees a large measure of control over their retirement plans.
- Give employees the option of participating or not.
- Provide your employees a retirement plan at far less cost to you than a traditional pension.
Decide what type of 401(k) you will use
The cheapest is a plan in which you don't match your employees' contributions. If you choose to contribute, you need to decide how much and in what fashion. You can contribute a set percentage along with your employees. You can make your contribution a bonus paid annually. You can use the contribution as part of a profit-sharing program. Whatever method you choose, participation by your employees needs to be voluntary.
Get familiar with plan providers
It's important to gain an understanding of the 401(k) industry. Because 401(k) plans are complex, most companies hire a plan administrator to run their programs. Banks, brokerage houses and other financial services companies offer 401(k) plan services. But even the biggest banks typically use another outside vendor. You can buy directly from some of the same vendors. In addition, some offer more hands-on 401(k) software, usually at reduced costs.
Compare plan options and providers
When shopping for a plan, compare both prices and services. If you have only a few employees, you probably don't need an expensive plan with lots of options. You want to make sure the plan is both affordable and adequate for your needs. If you decide to use a self-run software plan, you should take it for a test drive to be sure you're comfortable running it.
Know what you're getting before you buy
There's lots of fine print in even the most basic 401(k) plan. Make sure you understand what you're getting and how much it will cost before you buy. Starting over can be a real headache.
- Even do-it-yourself software plans should offer help lines and backup assistance in managing your plan.
- Watch out for hidden costs and fees, particularly investment transaction fees that can eat into your employees' savings.
- Ask other small business owners and your own accountants and lawyers for recommendations on 401(k) plans. Your best advice might come from someone you already know or work with.
- Don't forget about your own retirement. You can participate in your company 401(k). Even if you don't currently have employees, you can set up a 401(k) for yourself.