Everything you Need to Know About Small Business 401K Plans

Danielle Antosz
Last Updated on June 18, 2020
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If you’re a small business owner, retirement planning isn’t something you’d typically get excited about.

It’s easy to see why. ROTH IRA, 457(b),401 (k), pension? A lot of acronyms and terms get thrown around.

Of course you know most larger employers offer a 401(k) plan, an employer-sponsored retirement account that allows workers to save money for retirement in a pre-tax account.  This means employees do not pay income tax on their retirement savings until they begin pulling money from the account.

Small Business Retirement Plans

And more and more small businesses are offering access to retirement benefits, too.

But, there are hundreds of different 401(k) providers, each with their own terms, fees, benefits, and drawbacks.  Plus, many plans require you to have hundreds of employees or millions in the accounts.

With all the requirements and hassle, you might wonder if it is even worth offering a 401(k) plan.

The truth is, offering retirement savings accounts can boost your bottom line, your tax-savings. and your business results.

When you invest in a 401(k) plan, your business can be competitive by attracting top talent.

Now if you are overwhelmed or lost when it comes to selecting a 401(k) plan, this guide is for you. We will give you all the information you need to select the right provider for your small business and your employees.

Can a Small Business Offer a 401(k) Plan?

Yes, small businesses can offer a 401(k) plan for their employees.

In fact, any business with any number of employees can offer a 401(k) plan. There are a variety of different types of plans, so even owner-operated or sole-proprietors can open a 401(k).

Plus, a new federal law now makes it easier than ever for small businesses to offer 401(k) plans by joining with other small companies to offer a shared 401(k) plan.

LLCs may consider opening up a SEP IRA, which allows for higher contribution limits. However,  these accounts only allow for employer contributions.

The Right 401(k) for Small Business Owners

With hundreds of plans on the market, how do you know which is the right one for your business?

We will compare a few of the most competitive options in the following sections, but first, let’s look at a few features you should keep in mind when comparing 401(k) plans.

Fees

When comparing 401(k) plans, make sure to consider the variety of fees. The most common types of fees include administrative fees, record-keeping fees, investment fees, revenue sharing, as well as audit and consulting fees. Some funds will come with setup costs, too.

Keep in mind the impact that higher fees can have a on your savings over time. Though a few percentage points might not seem like much, that money could have been growing every year.

Also, consider ‘hidden’ fees that might not be as obvious off the bat. Yearly fees and higher fees for larger investments can quickly make lower-cost options more expensive.

Ease of Use

As a small business owner, you have a lot on your plate. You may be managing marketing, payroll, and HR all on your own or with the help of just a few employees.

An easy-to-use interface can make a huge difference when it comes to whether you or your employees will actually get the most out of the plan you select.

In addition to an easy-to-use dashboard, consider whether the plan will integrate with your current payroll software.

Flexibility

A lot of 401(k) plans say they are “flexible,” but aren’t always clear on what that means.

In most cases, these plans give employees access to a wider range of investment options. For example, moving to more stocks and mutual funds as retirement comes closer.

Other flexibility options to keep in mind may include the ability to roll over previous 401(k) accounts and whether the plan will grow with your business as your account holding or the number of employees increase.

Eligibility

Be sure to pay attention to eligibility requirements — including if the plan will grow with your business.

Common eligibility criteria for small business 401(k) plans:

  • Certain number of assets
  • Certain number of employees
  • A specific level of enrollment

Benefits of Small Business 401(k) Plans

There are a variety of benefits for offering a 401(k) plan. The most obvious benefit is to help your employees save for retirement.

Other benefits of offering a small business 401(k) plan include:

  • The ability to attract talented workers in today’s competitive job market.
  • Retaining valuable employees as they age and retirement becomes more important to them. Forty percent of small business employees said they would be willing to leave their current job for an employer that offers the benefit of a tax-deductible retirement savings options.
  • Tax write-offs for the amount you contribute to employee’s plans as well as tax credits for the cost to set up and manage a qualifying plan.

If you are a solo-business owner, you can also enjoy more tax benefits, as you may be able to contribute as both an employee and an employer, depending on the plan.

How Much do Small Business 401k Plans Cost?

Thanks to technology, 401(k) fees have declined in recent years. This is due, in part, to decreased management costs as a result of online portals for managing investments: since less manual work is involved, fees have decreased.

Though 401(k) costs vary by plan, expect to pay between .50% and 2% annually in fees. For many plans, the percent may drop for larger investments.

We’ve pulled together the costs of the best small business 401 (k) plans in this comparison table.

Best Small Business 401(k) Providers

There are hundreds of 401(k) options on the market, which can make it incredibly overwhelming. The good news is that the field is incredibly competitive, which makes it more likely you can find a great plan that fits your specific needs.

Here are the top 401(k) providers to consider.

Vanguard

As one of the largest mutual funds in the world, Vanguard’s name carries a bit of weight. But, what about their 401(k) plans for small businesses?

They offer several plans, including the “solo” (or “individual”) 401(K) plan for the self-employed or business owners who don’t have employees, other than their partners and their partners’ spouses.

Features of this plan include low fees (just $20 per year), the ability to contribute as both an employee and employer, no minimum initial investment, and a range of investment options, including mutual funds and index funds. You cannot take a loan out against this account, however.

Merrill Edge

Designed specifically for small businesses and their employees, Merrill Edge developed their small business 401(k) plan to be simple and affordable.

Features include employee matching, variety of investment options, educational call-center support, low annual costs (just .52%, though there are other fees), and proactive alerts to help both employer and employees make the most of their retirement savings.

Betterment for Business

Driven by technology and a passion for helping make the 401(k) process easy for both employers and employees, Betterment for Business offers flexible plans with transparent fees. It also integrates with payroll solutions, like ADP and Quickbooks.

Features include a simple web-based platform, personalized investment advice, dedicated support, and customized plans for businesses with 0 to 200+ employees, though it seems best suited to those with over a million in assets and 100 or more employees.

American Funds

As one of the largest mutual fund groups in the world, American Funds offers a wide range of 401(k) retirement plans that can be customized based on the size of your company.

Features vary by plan, but often include employer matching, a wide range of investment options, and a robust online education and resource center.

American Fund also offers a range of other retirement plan options, including SIMPLE IRAs and 403(b) plans.

ADP

One of the biggest names in payroll, ADP also offers a small business 401(k) plan. Consider ADP if you’re looking for flexible plan design, the ability to choose investment options, loan options, and an easy to use online portal with built-in notifications.

They also offer a SIMPLE IRA plan, which allows both employer and employees to contribute to retirement savings while enjoying less paperwork and no minimum participation.

Fidelity Investments

Created for public or private companies with more than 20 employees, this 401(k) plan offers a flexible design, wide range of mutual fund investment options, and clearly communicated fees for admin costs.

Their plan also allows for employer matching and loans. Employees also gain access to investment tools and educational tools to help simplify plan management.

ShareBuilder 401k

Advertised as a “simple, no low-cost” option, their small business 401(k) plans feature easy setup and fees that are 68% below industry standard (according to their website).

ShareBuilder 401k provides loan options, and the ability to invest in a variety of assets and funds, including stocks, bonds, money market, and index funds.

They also offer solo 401(k) for self-employed and owner-only businesses.

Paychex

Although mostly a payroll and HR service, Paychex also offers a small business 401(k) plan. Features include integration with their payroll services, easy management, the option for auto-enrollment, investment advice, and the ability to match investments with each employee’s acceptable level of risk.

They also advertise “fee transparency,” which may be useful when comparing it against other plans.

T.Rowe Price

For businesses with fewer than 1,000 employees, this cost-effective plan offers a range of investment options, including over 100 no-load mutual funds and a self-directed brokerage option.

Features include access to a 24/7 online management tool, employer contribution options, and salary deferrals up to $19,000 in 2019.

401k Provider Comparison Chart

We’ve pulled together the key criteria for these popular small business 401 (k) funds.

 FeesEase of UseEligibility
VanguardStarts at $20Easy setup, vary contribution limitsAnyone from a freelancer to a small business owner with employees
Merrill EdgeSetup fees are $390 plus monthly administration fee of $90Purchase plan online and manage plan online Plans available for sole proprietors, partnerships, and NPOs
Betterment for BusinessFees between 0.10% and 0.60%Plan management via mobile appAnywhere from a single employee
American Funds$10 setup fee
$10 monthly costs
Easy plan design, no IRS plans to complete

Ideal for businesses with 100 or fewer employees
ADPNot published Minimal paperwork, easy setup Plans available for small businesses with 1 to 49 employees and 50 to 999
Fidelity InvestmentsFees vary by plan
Online access and flexible plan design
Public and private companies with more than 20 employees
PaychexNot published Easy online plan management Options for small businesses with between 1 and 1000-plus employees
T.Rowe PriceFees vary by plan -starting at $20 for the SEP-IRA
Online plan managementEmployers with fewer than 1,000 employees.

Setting up a Small Business 401(k)

Selecting the right plan is just the first step.

Now it is time to get your 401(k) set up. The exact process may vary based on the plan and provider, but most will include the following steps:

  1. Compare the plans above: Be sure to compare the costs and features carefully before committing to a specific plan. Consider long term costs (such as what happens when you hire more employees) as well as current costs.
  2. Create (or review) a written plan document: If you use a financial institution to handle your 401(k), they may take care of this for you. This plan will outline the terms and conditions, including how much the employer match is, who is eligible, and when funds are distributed.
  3. Set up a trust and a trustee: The trustee is responsible for managing contributions, investments, and distributions. This may be the company you hire to offer your plan or someone in accounting or HR.
  4. Decide how to handle bookkeeping: Many of the technology-driven 401(k) providers will make this part easy, but you still need to assign someone to keep an eye on contributions, earnings, losses, expenses, and distributions. You will need all this info to prepare annual reports, which are required by law.
  5. Spread the word: Once you’ve set up the plan, you need to get your employees on board. Set up a meeting or send out information via email to let employees know they can enroll — be sure to highlight major benefits such as pre-tax contributions and employer matching, if you offer it.
  6. Schedule your annual 401(k) testing: Traditional 401(k)s are required to conduct annual nondiscrimination testing, to ensure that all employees are benefiting, not just the highest earners. This IRS.gov guide walks through the requirements you must meet and how to fix your plan if it does not pass the ACP nondiscrimination test.
  7. Don’t forget the tax write-offs: Don’t forget to include the costs to run the 401(k) when tax time rolls around. Your CPA or a tax professional can help determine what this means in your specific situation.

FAQ

Below we’ve answered some common questions we receive about 401(k) plans. If you have a question of your own, feel free to post it in the comments section below this article. We’d be delighted to answer it.

What are the limits of employee contributions to 401(k) plans?

For 2020, employees can contribute up to $19,500 to their 401(k). Those who are over 50 years of age can make an additional $6,500 in “catch-up” contributions for a total of $26,000.

The total limit of what an employee and employer can contribute to a 401(k) is $57,000 or $63,500 including “catch-up” contributions.

What is a profit-sharing 401(k)?

A profit-sharing 401(k) is a retirement plan that an employer can contribute profits towards.

Unlike an employer match plan, this plan provides the business owner with the flexibility to determine how much will be contributed (if anything) in any given year.

Conclusion

Nearly half of all Americans do not have enough saved for retirement — in fact, many have nothing at all saved, according to this report from the U.S Government Accountability Office.

As a small business owner, you can help ensure you and your employees are ready for retirement and ensure your company is able to hire workers for years to come.

Have more questions about opening a 401(k)? Drop a comment below with your questions or experience.

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