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Advice on Setting up Your First 401(k) as a Business Owner

Congratulations! Your business has grown, and now it’s time to establish a 401(k) retirement plan. A 401(k) provides an efficient and easy way for you and your employees to save for retirement. And there are some great tax incentives, too! You can choose from a variety of retirement plans, each of which carries its own benefits.

The most common employer-sponsored retirement plans are the SEP IRA, Simple IRA, Solo(k) and Traditional 401(k). And coming in 2024 is a new plan: the Starter(k)! All of these retirement plans range in flexibility, cost, administrative burden and fiduciary liability.

Prior to choosing a 401(k), think clearly about what goals you want this plan to accomplish. Are you looking for a benefit that can be used to recruit and retain employees? Are you aiming to maximize your personal retirement savings? Or perhaps your priority is finding additional tax incentives for the business?

The second key consideration is do you plan to contribute as an employer? The plans differ in the rules for employer contributions. The SEP IRA is funded only with employer contributions (no employee contributions), and the Simple IRA requires an employer contribution and allows for employee contributions. The Starter(k) does not allow an employer match or contributions. The traditional 401(k) plans offer maximum flexibility where you can choose to contribute or not contribute employer dollars.

A third consideration is how much do you, or your employees, intend to save? Different plan types have different IRS contribution limits, with the traditional 401(k) allowing for some of the highest salary deferral amounts. Plans like the Simple IRA and Starter(k) have much lower contribution levels that may not meet your needs.

Another consideration is how much fiduciary liability are you willing to accept? An employer takes on more fiduciary responsibilities as they make financial decisions that impact others. For example, in a traditional 401(k), you will work with an advisor to determine a fund lineup that employees can choose from. Creating this fund lineup is a key area of fiduciary responsibility. Don’t worry. There are plenty of advisors and resources out there to assist you, but employers should never underestimate what it means to be a fiduciary.

Of course, you will want to consider complexity and cost. Traditional 401(k)s provide the most flexibility when it comes to plan design. Everything from eligibility periods, vesting schedules, loans and more can be designed specifically to your organization’s needs, within the relevant federal rules and regulations. Of course, with added complexity comes cost. You will want to balance the flexibility of designing your own plan with the cost of implementation and administration.

And finally, you will need to decide what professionals you will engage to support you. I recommend you start with a CERTIFIED FINANCIAL PLANNER™ professional who specializes in helping businesses create their employer-sponsored retirement plans. A CFP® professional can help guide you through all of the considerations outlined above.

Additionally, most plans will have a recordkeeper, a custodian and a third-party administrator. Again, the amount of support you’ll need varies depending on the complexity of the plan, but all retirement plans will need a provider to record the participant accounts and maintain custody of the funds. Once you’ve settled on the type of plan you want to offer, your CFP® professional can also help you determine which provider is best for you. Find your CFP® professional today.

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401(k) Retirement Plans Small Business Planning