Small Business 401(k) Plans: What to Know About Employee Retirement Plans

What is a 401(k) plan?

A 401(k) plan is an employer-sponsored benefit that allows employees to save money for retirement. According to the IRS, a 401(k) is a feature of a qualified profit-sharing plan that allows employees to contribute a portion of their wages to individual accounts. Employees typically have several choices for the types of investments the money is put into.

How do 401(k) plans work?

These retirement plans are straightforward: 

1. A business offers a 401(k) plan to its staff. 
2. Employees sign up and designate a percentage of their paycheck to be placed into their retirement investment account. 
3. The money will grow – often significantly – throughout the employee’s career to help fund their retirement.

Eliza Guilbault, vice president of workplace consulting thought leadership and commercialization at Fidelity, says most workers are responsible for funding their own retirement in the current workplace environment. “We are shifting from an employer-funded pension plan to a defined contribution plan landscape,” Guilbault explained. “A 401(k) is a great way to save for the future.”

While employers sponsor these plans, the investment money belongs to the employees. The money they contribute to their account is theirs to take if and when they move on to a new job. 

What is 401(k) matching? 

To boost participation, employers sometimes contribute to their employees’ 401(k) accounts based on each employee’s contribution. They may entirely or partially match an employee’s contribution up to a specific percentage. For example, if an employee contributes 4 percent of their paycheck, their employer might match that contribution, essentially doubling the employee’s contribution. 

Employers may implement a vesting period that dictates how long an employee must stay with the organization before the matching contributions fully belong to them. Implementing a vesting schedule helps incentivize employees to stay with the company. 

How much can employees contribute to a 401(k)?

As of 2024, an employee can contribute up to $23,000 annually. If a business owner matches the investment, the contribution amount cannot exceed $69,000 per year. Those age 50 and older can contribute an additional $7,500.

What are the types of 401(k) plans?

There are a few types of 401(k) plans, including the following popular ones: 

• Traditional 401(k)s: In a traditional 401(k) plan, the money an employee chooses to invest in the plan is pretax. In other words, the money they contribute comes out of their paycheck before taxes are deducted. However, they will pay taxes on the money when they withdraw it from their retirement account.
• Safe harbor 401(k): A safe harbor 401(k) is similar to a traditional 401(k) but lets business owners avoid mandatory compliance tests if the company makes specific mandatory contributions. 
• Roth 401(k): With a Roth 401(k) plan, money comes out of an employee’s paycheck after taxes have been deducted. Because the taxes were paid upfront, employees won’t pay taxes on the money when they withdraw it. It’s a popular option for employees who aren’t concerned about immediately reducing tax liabilities and want to grow assets tax-free over time.

What are the benefits of offering a 401(k) plan to employees?

While offering a 401(k) plan allows employees to save pretax dollars for retirement, it also brings  significant benefits to a business, including the following:

• Offering a 401(k) plan increases employee loyalty. Employees feel more loyal to an employer offering a 401(k) plan, particularly one that contributes matching funds. Loyal employees fuel a workplace with increased employee retention and satisfaction.
• Offering a 401(k) plan helps you attract top talent. Businesses can attract and retain top talent by offering perks like 401(k) plans and a robust employee benefits package that includes health insurance. “I think it is really important, if you are trying to grow your business, to think through offering a 401(k) plan and what that can mean to attracting and keeping talented employees,” Guilbault advised.
• Offering a 401(k) plan lowers company taxes due. Employer contributions to employee 401(k) plans are tax-deductible, which helps the company financially. Some businesses may even qualify for tax credits. 
• Offering a 401(k) plan helps business owners. When there’s a 401(k) plan, business owners can contribute significant money toward their own retirement. They can better plan their future and ensure their financial security.

How do I set up a 401(k) plan for my business?

While a 401(k) plan is a benefit traditionally offered by larger organizations, Fidelity’s Guilbault says small businesses should strongly consider offering one too. “Many [retirement plan] providers have solutions that are great for small businesses,” Guilbault noted. “Fidelity works with thousands of small businesses.”

To set up a 401(k) plan for your business, take the following steps: 

1. Select a 401(k) plan provider.

Numerous dedicated retirement plan providers exist. Additionally, the best online payroll services and the best professional employer organizations often provide 401(k) plan management in addition to their core services. 

For example, Gusto is a multifaceted platform that offers payroll, employee benefits and human resource management software. Its payroll services can easily and accurately accommodate 401(k) contributions and matches. Read our review of Gusto HR software and our Gusto payroll software review to learn more. 

2. Check state regulations regarding retirement plans.

States have various rules and regulations about retirement plans. Some states even require employer-sponsored retirement plans. For example, in California, if your business has even one employee (who isn’t the owner), you must offer a retirement plan that meets specific criteria. Businesses can register with the state’s CalSavers program to access retirement plans or create their own employee retirement plan. 

Every small business owner should research their state’s rules. 

3. Decide what 401(k) plan features you want.

401(k) plans have various features and functions, so business owners must make some decisions. Consider whether you want any of the following: 

• Automatic enrollment: You may want to implement an automatic 401(k) enrollment policy, where each employee is automatically enrolled in the 401(k) plan at a specific savings percentage unless they opt out. Automated enrollment can lower the overhead costs of providing this benefit and make it easier for employees to maintain it.
• Matching contributions: You’ll need to decide whether you want to match contributions. While matching isn’t a requirement, Guilbault says it could pay off in the long run. “A well-designed 401(k) plan, with a company match and that incentive, can really help keep people and attract the right people [a business is] looking for,” Guilbault advised. Matching contributions is a significant employee perk that incentivizes employees to save more. However, it’s not a viable option for businesses that aren’t profitable or must cut business expenses. 
• Professional management: When you provide professional management for your retirement plan, employees can access a financial advisor who will help them with fund selection and contribution amounts.

4. Determine your 401(k) plan costs.

For small businesses, the costs of offering a 401(k) retirement plan can vary greatly.

• Setup and maintenance costs: Plan providers typically charge setup and maintenance fees. Setup costs can range from $500 to $2,000, while maintenance fees are usually based on the number of participating employees. Annual administration fees can range from $750 to $3,000. The plan’s assets, the employer or the participants’ accounts may cover administrative fees. 
• Plan add-ons: Additional plan features, including automatic enrollment, increased fund options and professionally managed services, will add to your costs. 

While providing a 401(k) plan incurs costs, some expenses may be offset by specific tax deductions for which small businesses with fewer than 100 employees may be eligible. For example, you may be able to deduct administrative fees from your business taxes. You may also be able to take advantage of tax credits.

What are 401(k) alternatives for small businesses?

A 401(k) is not the only option for small businesses looking to establish a retirement plan for their employees. Business owners should also consider SEP and SIMPLE IRA plans as potential alternatives. 

• SEP IRA: A Simplified Employee Pension (SEP) IRA allows employers to put away up to 25 percent of their income to save for retirement. Business owners can establish these funds for themselves and their employees. SEP contributions must be made by the employer on behalf of the employee; there are no employee contributions. 
• SIMPLE IRA: A SIMPLE IRA is a retirement plan that allows employers and employees to contribute to an employee’s retirement savings. In a SIMPLE IRA, an employer must match up to 3 percent of an employee’s annual compensation or make a 2 percent non-elective contribution for employees, with an annual limit of $345,000 for 2024.

What are the top employee retirement plan providers?

The best business employee retirement plans will help you provide your employees with competitive benefits at a price you can afford. The following options are excellent choices for small businesses getting started with retirement plans:  

Human Interest

Human Interest is an affordable provider with minimal investment fees and low monthly employer and employee fees. Its flexible retirement plans can be customized to address an employer’s specific needs. Read our Human Interest review to learn about its plan administration functions, employee onboarding features, and top-notch customer service.

ADP

ADP is a popular payroll provider that also offers 401(k) account administration. Businesses can integrate with ADP payroll to make processing contributions automatic and easy. Employers will also appreciate ADP’s mobile app, which helps employees easily enroll in a plan and check their funds’ performance. Our review of ADP explains this platform’s unique features, including a dedicated manager to help you set up your plan.

Paychex

Paychex offers traditional 401(k) plans, owner-only 401(k) plans, solo 401(k) plans and SIMPLE IRAs. Business owners can customize their plans based on their company’s needs. If you use Paychex for payroll and other HR services, layering in retirement savings is seamless. Our Paychex Retirement Services review highlights the platform’s self-serve interface, which lets employees log in to monitor their balances and manage their contributions.

USA 401k

USA 401k keeps it simple with two choices: a safe harbor 401(k) and a traditional 401(k). Information about each option is readily available on the company’s website, making it easy for a business owner to decide what they need. We like that, during enrollment, employees can speak to a licensed representative for individualized guidance. Our USA 401k review explains how the platform offers fiduciary services for its more than 15,000 investment funds and even lets plan participants invest in individual stocks and bonds. 

ShareBuilder 401k

In addition to solo, safe harbor and traditional 401(k) plans, ShareBuilder also offers a tiered profit-sharing 401(k) plan. This plan provides a low-cost retirement planning solution with below-average investment fees of only 1 percent and additional savings as your employees save more money. Our ShareBuilder 401k review explains how employees can choose from five managed portfolios or build their own from ShareBuilder’s low-cost index funds.