Business 401k Plans

As a small business owner preparing to establish a 401(k) Plan for you and your employees, should must remember your fiduciary responsibility.  An important part of your fiduciary responsibility is to establish a trust fund to place the 401(k) Plan’s assets.

The trust fund established  must assure assets of the 401(k) Plan are used soley to befefit those employees and their beneficiaries. 

The trust established must have at least one trustee whose responsibility is to  handle the contributions, investments and distributions to and from the Plan.  This is probably the most important decision you will make in establishing a 401(k) plan  as the financial integrity of the plan depends on the chosen trustee.  Unless you are experienced in the investment field, it is wise to look to those experienced and willing to provide references.

Interview at least 3 prospective trustees from financial institutions and/or insurance companies experienced in managing 401(k) Trust Funds. 

As a small business owner or manager, you are responsible for compliance with Federal law in establishing and maintaining a 401(k) Plan for your employees. Selecting a competent professional consultant or service provider to establish and monitor your 401(k) Plan makes the most sense.  Selecting the appropriate consultant can be one of the most important decisions you will make in establishing a 401(k) Plan. 

As a small business owner or manager, you need to first consider what specific services you will require for your plan.  Will you require legal advice?  Will you require long term accounting, recordkeeping, investment management, or a trustee?  Don’t select the first consultant you talk to.  Talk to a minimum of three consultants prior to making a decision.  Ask potential consultants / service providers about the services they provide. 

Present each prospective professional consultant / service provider with identical outline relating to the needs of your 401(k) Plan.  Request a written proposal from each potential consultant along with detailed fees and expenses they require to establish, and or maintain the 401(k) plan.  Also ask potential consultants to be specific about what, if any services they do not provide.  You do not want to be surprised with unexpected fees or lack of services once you have retained a consultant.  Also ask for customer references or other information relating to the quality of their services or customer satifaction with their services - as well as any possible alliances the potential consultant may have with other services or service providers.  (These arrangements are often called “bundled services”). 

Once you have chosen a professional consultant or service provider for your 401(k) Plan, it is a good practice to periodically review the performance of your consultant or service provider to ensure they are providing the services at the cost per your service agreement. 

As a small business owner or manager wanting to establish a 401(k) Plan you should be aware of certain requirements and responsibilities.  There are four basic actions required in establishing a 401(k) Plan in order to have certain tax advantages.

You will be required to (a) Adope a written plan, (b) Arrange a Trust Fund for the 401(k) Plan’s assets, (c) Develop a record keeping system for the 401(k) plan, and (d) Be prepared to provide 401(k) plan information to participants in a timely manner.

Most small businesses choose the option of consulting with a professional consultant - such asa bank, mutual fund provider, or an insurance company.  Professional consultants are available not only in establishing the 401(k) Plan by meeting all the requirements necessary in insuring the Plan will be able to take all tax advantages associated with establishing the 401 (k) plan, but also in maintaining the Plan. 

A professional consultant is also able to assist the small business in determining which type of plan is best for your business, yourself and your business’s employees who will be taking advantage of the 401(k) Plan you will ultimately offer.  They will also assist you in choosing some of the 401(k) Plan’s features, such as employee’s contribution (if any), as well as features required by law - such as how contributions are deposited into the Plan. 

The professional consultant will also assist you in estabishing the trust and taking care of timely record keeping on a regular basis.  All time consuming requirements that are performed by a professional consultant - freeing you, the business owner or manager, to direct your valuable time towards operating your business.

There are many advantages for a small business establishing a 401(k) program for both employers and their employees.  The proper plan will provide security for retirement for both the employers and their valued employees.

Many employers consider various 401(k) options for their tax advantages.  Employers are entitled to a tax deduct for their contribution to employees account/s.  As an employer, you have the option of how much (if anything) you plan to contribute.

A properly designed 401(k) plan can be tool in keeping valuable employees, or attracting the right people.  As a small business owner or manager, you open the ability to personally participate, taking advantage of the personal tax deductions and as well a defurring taxes on capital gains derived from 401(k) accounts. 

In future articles I plan to focus on procedures required in establishing a 401(k) program for your small business.  I would like to hear comments from my readers.