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management

How to Set Up
a 401(k)
As the labor pool becomes a bit tighter, small business owners
look for time-tested ways to recruit and keep workers. For
example, 401(k) plans are a valuable option for businesses
considering a retirement plan, providing beneﬁts to employees
and their employers.
Employers start a 401(k) plan for many reasons, including

MARK LAMOYNE/SHUTTERSTOCK

the fact that it allows participants to decide how much to
contribute to their accounts. Employers are entitled to a tax

Once you have decided on a 401(k) plan, you will need to

deduction for contributions to employees' accounts.

choose the type of 401(k) plan that is best for you - a traditional 401(k) plan, a safe harbor 401(k) plan, or an automatic

The money contributed may grow through investments in

enrollment 401(k) plan. In all of these plans, participants can

stocks, bonds, mutual funds, money market funds, savings

make contributions through salary deductions.

accounts, and other investment vehicles.
A traditional 401(k) plan offers the maximum ﬂexibility among
Contributions and earnings generally are not taxed by the

the three types of plans. Employers have discretion over

federal government or by most state governments until they

whether to make contributions for all participants, to match

are distributed. Further, a 401(k) plan may allow participants

employees' deferrals, to do both, or to do neither. These contri-

to take their beneﬁts with them when they leave the company,

butions can be subject to a vesting schedule (which provides

easing administrative responsibilities.

that an employee's right to employer contributions becomes
non-forfeitable only after a period of time). Annual testing

Establishing a 401(k) Plan

ensures that beneﬁts for rank-and-ﬁle employees are propor-

When you establish a 401(k) plan, you must take certain basic

tional to beneﬁts for owners/managers.

actions. One of your ﬁrst decisions will be whether to set
up the plan yourself or to consult a professional or ﬁnancial

There are several kinds of 401(k) plans that aren't subject to

institution - such as a bank, mutual fund provider, or insurance

the annual contributions testing required with traditional 401(k)

company - to help with establishing and maintaining the plan.

plans. These are known as safe harbor 401(k) plans and, in
exchange for avoiding the annual testing, employees in these

In addition, there are four initial steps for setting up a 401(k) plan:

plans must receive a certain level of employer contributions.

* Adopt a written plan document.

Under the most popular safe harbor 401(k) plan, mandatory

* Arrange a trust for the plan's assets.

employer contributions must be fully vested when made.

* Develop a recordkeeping system.
* Provide plan information to employees eligible to participate.

An automatic enrollment 401(k) plan allows you to automatically enroll employees and place deductions from their sala-

Plans begin with a written document that serves as the founda-

ries in certain default investments, unless the employee elects

tion for day-to-day plan operations. If you have hired someone

otherwise. This is an effective way for many employers to

to help with your plan, that person likely will provide the docu-

increase participation in their 401(k) plans.

ment. If not, consider obtaining assistance from a ﬁnancial institution or retirement plan professional. In either case, you will be

The traditional, safe harbor, and automatic enrollment plans are

bound by the terms of the plan document.

for employers of any size. US DEPARTMENT OF LABOR

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