5 Tips for Establishing an Efficient and Affordable 401(k) Plan for Your Small Business

Author: Siân Killingsworth / Reviewer: Andrew Meadows
9 May 2023 / 401(k) Plan Information, Safe Harbor, Small Business 401k

Setting up a small business retirement plan can seem like a daunting task, but with the right guidance, it can be done efficiently and affordably. These five steps can help you establish a 401(k) plan for your small business as quickly and easily as possible (because we know you don’t have time to waste).

Step 1: Choose a Plan Provider

The first step in establishing a small business retirement plan is to choose a plan provider. We suggest working with a low-fee, transparent 401(k) provider (like Ubiquity!) to help you find the plan that’s right for your small business and your employees’ needs – especially one that charges only flat fees. This type of fee remains steady over time so you can accurately predict plan costs. Many providers charge a percentage, or assets under management (AUM) fee, which fluctuates as your balance changes. Over time, the percentage fees can erode your savings significantly.

Learn more about flat fees versus percentage fees here.

Step 2: Determine an Appropriate Plan Type

The first step in setting up a 401(k) plan for your small business is making sure the plan meets your company’s unique needs. There are several plan types to consider when picking a 401(k) plan for your small business, including:

• Solo 401(k): A solo 401(k) plan is designed for small business owners who have no employees other than their spouse. With a solo 401(k), small business owners can make contributions as both an employer and an employee.
• Traditional 401(k): Business owners, including those who are self-employed, can start a 401(k) plan for themselves and their employees, if applicable. A 401(k) plan enables businesses to meet retirement planning and saving goals while taking advantage of business and personal tax benefits. With a Ubiquity 401(k) plan, retirement contributions can be either pre- or post-tax (Roth), with funds being deposited directly from an employee’s paycheck each pay period. Many companies also match a part of their employees’ contributions.
• Roth 401(k): A hybrid between a Roth IRA and a 401(k) plan, earnings on after-tax contributions grow tax-free. However, the contribution limits in a Roth 401(k) are significantly higher than a Roth IRA — $22,500 ($30,000 if age 50 or older) in 2023, compared to $6,500 for a Roth IRA (plus an additional $1,000 if age 50 or older).
• Safe Harbor 401(k): A Safe Harbor provision is added to 401(k) plan to make it easy to avoid some of the IRS tests that traditional 401(k) plans are subject to. Safe Harbor 401(k)s are exempt from nondiscrimination testing, significantly reducing your administrative burden. Just remember that with a Safe Harbor plan, employers are required to contribute to the plan by matching a portion of their employees’ contributions or by making a fixed contribution each year.
• New Comparability 401(k): If you want to reward or particularly motivate certain employees, a New Comparability provision can be added to a traditional 401(k) plan. It enables customized retirement plan contributions for different groups of employees. This allows you to reward select groups with higher contributions while still offering healthy employer contributions to others. Known as a qualified defined contribution plan, the profit-sharing formula works by projecting out an employee’s current contribution to a future retirement-age benefit.

Step 3: Set Up Your Plan

After you’ve chosen a provider, it’s time to set up your plan. Work with your chosen provider to get all the provisions set up and all information uploaded properly. Make sure you have the information you’ll need, including:

• Employee information such as dates of employment and birth, email addresses, SSNs, etc.
• Select plan features and provisions, such as eligibility, contributions limits, and vesting schedules.
• Decide who will be the company’s primary contact, This could be the company owner, the human resources representative, or another trustee.

Step 4: Educate Your Employees

Your employees are more likely to participate in your plan if they understand the benefits! We recommend holding informational meetings to explain the plan’s features and benefits, then providing additional resources to help your employees make informed investment decisions.

Step 5: Manage and Monitor Your Plan

A 401(k) plan for your small business isn’t a set-it-and-forget-it type of thing. You’ll need to submit your employee and employer contributions on time every time. Integrating your plan with your payroll provider is a great way to streamline this process.

It’s important to review your plan’s fees and investment options periodically and make changes annually or as your business, headcount, or finances change.