How To Choose the Best 401(k) Plan for Your Employees

401(k) plans, retirement plans

Retirement benefits are a key component of a benefits package that attracts and retains top talent. Offering the right 401(k) plan gives you an advantage in competitive job markets while also helping your employees save for retirement. According to the Principal Financial Group’s Retirement Security Survey, 62% of workers view 401(k) employer match as a key to reaching their retirement goals. 

Tax benefits and owner retirement savings options also make establishing a 401(k) plan a smart choice for employers. This guide will help you learn more about the advantages of offering retirement plans to employees, how to get started and options for effectively distributing plan information.

What Is a 401(k) Plan?

A 401(k) is a company-sponsored retirement plan that allows employees to elect contributions to be withheld from their wages and deposited into an investment account. A 401(k) plan is named after a section of the Internal Revenue Code that provides regulations for these types of retirement plans. 

Within these plans, there are traditional and Roth options. The biggest difference between the two is how they are taxed. In short, traditional 401(k) employee contributions are pre-tax, reducing taxable income in the contribution year. In most cases, the trade-off is that future withdrawals are taxed at your marginal tax rates in the year of distribution. 

Roth 401(k) contributions do not reduce taxable income in the year of contribution as they are made with after-tax income. The benefit is that future distributions will be tax-free if you meet the rules on distributions.

Watch to Learn More About the Components of 401(k) Plans

Benefits of Offering a 401(k) Plan to Employees

By offering employees a 401(k) plan, companies can help workers take the first step towards retirement and saving for the future. Some business owners believe that these plans aren’t for them, are unclear of the benefits or believe that the process is too unmanageable. On the contrary, there are many upsides to offering this type of plan to employees:

  • Attracting and retaining employees: Top candidates will weigh the pros and cons of different employment opportunities. Offering a high-quality 401(k) plan can set you apart from other employers and attract quality talent. 
  • Assisting employees in saving for retirement: Today’s employees are struggling to make ends meet, let alone save for retirement. According to a recent report by LendingClub, 63% of Americans live paycheck to paycheck, including nearly half of those who earn six figures. Employees need a retirement plan that will help them save for their future and feel secure in their overall life plan.
  • Potential tax-saving advantages: Retirement plans enable employers to receive a possible tax credit of up to $5,500 annually for the first three years of the plan. In addition, there are also potential tax deductions for offering an employer-matching contribution. 
  • Ease of setup and maintenance: Many retirement plan providers offer automated processes for handling plan administration tasks. This can help reduce the risk of errors and help employers save time and money.
  • Potential increases in employee productivity: Financially stressed employees tend to be less productive at work. According to MetLife’s annual employee benefit trends study, 85% of financially healthy workers feel more productive at work. They are also more likely to be satisfied with their job and proud of their company.

401(k) plans

Steps for Setting Up a 401(k) for a Small Business

When you, as an employer, establish a 401(k) plan, there are certain actions you must take. According to the Internal Revenue Service (IRS), there are four basic actions necessary to have a tax-advantaged 401(k) plan:

  1. Adopt a written plan: Plans start with a written document that serves as the foundation for day-to-day operations. It is advised to seek the assistance of a financial institution or retirement planning professional. The first step will be to decide on the type of plan that works best for your business. Options include the following:
    • A traditional 401(k) plan allows for the most flexibility. The employer can elect to make contributions for all plan participants or offer a 401(k) match but is not required to contribute. These contributions can be subject to a vesting schedule, which sets out timing for when an employee’s right to employer contributions becomes nonforfeitable.
    • A safe harbor 401(k) plan is similar to a traditional plan but requires the employer to make annual contributions on behalf of employees. It is not subject to many of the complex tax and testing rules that are associated with a traditional plan.
    • An automatic enrollment plan allows an employer to automatically deduct a fixed percentage or amount from an employee’s wages and contribute that amount to the retirement plan unless the employee has proactively chosen to contribute nothing or a different amount.
    • A SIMPLE 401(k) plan was created for small businesses to have an effective, cost-efficient way to offer benefits to their employees. This option is available to employers with 100 or fewer employees who received at least $5,000 in compensation from the employer for the preceding calendar year. It is not subject to the annual nondiscrimination tests that apply to the traditional plans, and the employer must make fully vested employer contributions.
  2. Arrange a trust for the assets: A plan’s assets need to be held in a trust to ensure they are used solely for the participants and their beneficiaries. There must be at least one trustee to handle contributions, plan investments and make distributions. 
  3. Develop a record-keeping system: An accurate system tracks all relevant information, such as contributions, earnings and losses in participants’ accounts. If you are working with a financial institution, you can generally expect to have help with keeping the pertinent records.
  4. Communicate information to employees: You must notify eligible employees of the plan’s benefits and requirements on an annual basis. A summary plan description is typically completed in the written plan and will need to be sent to all plan participants.

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Determining the Right Contribution Amount

Employers may provide incentives for employees to contribute to their retirement plan via an employer match. The employer match can be based on several different criteria:

  • The percentage of the employee’s earnings that the employee elects to contribute.
  • The employer match is generally capped at a defined percentage, so even if the employee elects a higher contribution percentage, the employer match has a ceiling.
  • The employer match may be capped at a defined amount, such as up to $5,000 of the employee’s annual contribution.
  • A safe harbor match has two options available to the employer. The first option is a 3% match regardless of any employee contributions. The second option is a 100% match up to 3% of employee contributions, plus an additional 50% match for the next 2% of employee contributions. So, if an employee contributes at least 5%, the employer will deposit an additional 4% into the employee’s account.

Help Your Employees Grow With Business Workshops

What types of financial education does your organization currently provide? Does your financial advisor develop educational programs centered around the unique needs of your associates? Are you able to identify the effectiveness of any programs in place or is your business simply trying different topics and hoping some are beneficial to your workforce?

If you are looking for useful financial tools and would like to have options explained to your employees, Fortune Financial offers interactive workshops that are valuable to organizations. From 401(k) plans and health savings accounts (HSA) to general financial information such as understanding the market to identify the value of your digital assets, our experts explain how different financial tools help your business and employees secure a stable financial future. We invite you to experience the Fortune Financial difference with our informative, interactive workshops tailored to your organization’s needs.

Contact a Fortune Financial advisor to learn more about how we can help you determine the best retirement plan option for you and your business. Our team of experts is equipped to help you every step of the way. Email us at or scan the QR code below. Follow our YouTube channel and other social media accounts for more financial planning tips.

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Important Note

This material is provided for educational purposes only and does not constitute investment advice. The information contained herein is based on current tax laws, which may change in the future. Fortune Financial Advisors cannot be held responsible for any direct or incidental loss resulting from applying any of the information provided in this publication or from any other source mentioned. The information provided in these materials does not constitute any legal, tax or accounting advice. Please consult with a qualified professional for this type of advice. The information provided above is obtained from publicly available sources and is reliable. However, no representation or warranty is made as to its accuracy or completeness.