Should Your Business Offer Employees a Traditional 401(k) Retirement Plan?

If your small or mid-sized business is a success, at some point you may want to offer employees a retirement plan. As I discovered when evaluating retirement plan options for my business, there are several choices, including a traditional 401(k). When deciding whether to initiate a traditional 401(k) retirement plan, take these five factors into account.

1. A 401(k) can be a great way to attract and keep employees for several reasons. First, most workers know they need to save for their own retirement. Having a 401(k) plan makes it easier for them to get started and make automatic contributions to their retirement plan.

Second, no matter how much employees enjoy working for your company, they know that they are likely to have multiple employers before retirement. As a result, the portability of a 401(k) plan is very appealing to many workers.

Third, employees make tax-deductible contributions to their 401(k) and their investments grow tax-free until withdrawn.

Fourth, if you choose to make company contributions, your employee's 401(k) account balances will grow even faster.

Fifth, depending on how you structure the 401(k) plan, employees may have access to some of their savings, for example, through loans or hardship withdrawals.

Sixth, 401(k) contribution limits are relatively generous, allowing some employees to grow their retirement savings relatively quickly.

2. A 401(k) plan requires more administrative time and effort than some other small-business retirement plans. You will have to make a number of decisions about how to structure the plan, including who will be eligible to participate in the plan; what contributions, if any, the company will make to the plan; the vesting schedule for company contributions; whether to allow loans and hardship withdrawals; and which investment options to offer. You may need to hire a professional to set up and manage your plan.

3. You must understand the fiduciary duty connected with a 401(k) plan, so that is it managed properly for your employees and in order to limit your liability. This is another area where a professional can be invaluable in helping you understand your responsibilities.

4. Given the administrative complexities of a 401(k), there will be some expense to set up and maintain it, so you will want to investigate the cost before initiating a plan.

5. Your business may be eligible for a tax credit for some 401(k) start-up costs, so be sure to check with your accountant about the tax implications of starting a 401(k).

One important decision related to your company's traditional 401(k) is whether to make non-elective contributions for each eligible employee and/or matching contributions for some employee contributions. When deciding on whether to make employer contributions to a 401(k), you will need to balance the importance of these contributions to employees with the company's ability to afford them. The good news is, if you choose to make contributions, you will have the option to change or eliminate them in the future if need be.

Sources:

Randy Myers, "You Can Afford to Offer a 401(k) Plan Business on Main," BusinessonMain.msn.com.

Mie-Yun Lee, "What 401(k) plan is right for your business?" Yahoo Small Business.

"IRC 401(k) Plans - Operating a 401(k) Plan," IRS.gov.

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Choosing a Retirement Plan for Your Small Business

First Person: 5 Things I Wished I Had Know Before Starting My Small Business

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