How Do You Start a 401k? Five Simple Steps


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How Do You Start a 401k

401k plans are popular retirement vehicles for both large and small companies.  They offer flexibility and important tax benefits.  But the question remains – how do you start a 401k?

Here are the five steps to setting up a 401k:

  • Decide what type of 401k is right for you.
  • Decide who will set up your plan
  • Decide who will administer plan (including recordkeeping)
  • Fund the plan
  • Provide plan information to participants.

Step #1 – Determine the right plan

There are several different types of 401k plans.  They include: (1) traditional 401k plans; (2) safe harbor 401k plans; (3) SIMPLE 401k plans; and (4) solo 401k plans. Each plan has a different set of rules and requirements.  In addition, there are pros and cons to different plans.

Solo 401k plans are popular for business owners with no employees.  They can also be easily established and the plan participant can be the trustee.  This allows the participant to self-direct the investments.  It is the simpliest plan to set up and to administer.

Step #2 – Adopt the plan

Once you have decided the plan that makes most sense for you you will need to design a written plan document.  This will serve as the basis for the plan rules and govern how the plan is administered.

Part of adopting the plan will be deciding various plan provisions like (but not limited to): (1) including a Roth; (2) allowing rollovers; (3) providing a loan provision.

You will need to hire someone to establish the plan.  This will typically be a retirement plan provider, financial institution, or third party administrator (“TPA”).

Step #3 – Fund the plan

Plan funding sounds easy. But you need to determine how you are going to invest the money.  Are you establishing a traditional brokerage account?  Are you going to put the money in the bank?  Are you going to self-direct the funds and buy alternative assets like real estate, notes, etc?

But you will need to consider if you are making pre-tax or Roth contributions.  In addition, you may be making an employer contribution under a profit sharing plan.  Each scenario has different reporting and are reflected differently when it comes to tax time.

Step #4 – Plan administration

Once you have decided the plan that makes most sense for you you will need to design a written plan document. This will serve as the basis for the plan rules and govern how the plan is administered.

Part of adopting the plan will be deciding various plan provisions like (but not limited to): (1) including a Roth; (2) allowing rollovers; (3) providing a loan provision.

You will need to hire someone to establish the plan. This will typically be a retirement plan provider, financial institution, or third party administrator (“TPA”).

Plan administration can be very complex for traditional 401k plans.  But minimal for solo 401ks.  But this is where a TPA can help.  Your TPA will typically provide the necessary administrative and compliance tasks.  This includes the record keeping and filing required tax returns.

Step #5 – Provide information to employees

Once your 401k is established, you are required to make certain employee communications.  You must notify eligible employees of the plan benefits and requirements. A summary plan description (“SPD”) is the main vehicle that informs participants and their beneficiaries about the plan and how it works.  The SPD will be provided to you by the entity who establishes the plan on your behalf.

How Do You Start a 401k?

Starting a 401k should not be that difficult.  Most of the process can be accomplished by hiring an experienced company that can work with you to design, establish, and administer the plan.  Follow the five steps above and you will be well on your way.

Paul Sundin

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