This week’s “Ask the Mompreneur“ features an interview with Maxime Rieman, financial markets analyst for NerdWallet, a personal finance and investing website.
QUESTION: Once a small business reaches a point of stability and profitability, it becomes time to consider a company retirement plan. What advice do you have for entrepreneurs looking to set up their first 401(k) plan?
ANSWER: Setting up a 401(k) plan for your company can be beneficial for a multitude of reasons. First and foremost, it promotes financial security in retirement, which helps to attract and keep highly talented employees. When employees contribute to their 401(k) plan, it entitles them to a tax deduction. These contributions then grow through investments in mutual funds, money market funds or exchange-traded funds.
With such an important reason for establishing a 401(k) plan, the question you’re faced with as a small business owner is: How?
You must first decide whether you are going to set up the plan yourself or hire a professional. There are a multitude of financial institutions that will set up the 401(k) and help you maintain it, such as insurance companies, banks and mutual fund providers.
When finding a mutual fund provider, you want to be aware of the fees they will charge and the investment options that will be available to employees. Normally this is a tradeoff; providers with a limited selection of funds will often charge lower fees to the company because they are in a revenue-sharing program with the fund families. This may seem like a tempting option for small businesses that are looking to save money, but the expenses are simply being passed along to the employees, who pay higher expenses to the mutual fund.
As a small business, one full-service 401(k) provider to start with would be the Employee Fiduciary Corp. They boast low fees - $1,500 per year for administrative work and 0.06 percent of assets. In addition, as the employer you can add nearly any mutual fund to the plan without additional charges.
If you’re a larger company or growing quickly, you should consider going directly to a low-cost mutual fund provider, such as Vanguard. This may cost a bit more, but provides greater control over the terms and options of the 401(k) plan.
There are three different types of 401(k) plans for owners of a business to consider, so you should decide which plan type is the best for you.
A traditional 401(k) plan enables business owners to customize their plan according to their needs. For example, if the company is not in a good position to match employee’s 401(k) contributions, then a traditional 401(k) plan allows the company to not match contributions or to match only a certain percentage.
Then there’s the automatic enrollment 401(k) plan, which allows you to automatically enroll employees and place deductions from their salaries in default investments. The employee of course has the option to opt out, but this is generally a very effective way to get more employees to participate in company’s 401(k) plans.
The safe harbor 401(k) plan allows business owners to avoid the annual IRS nondiscrimination testing. Nondiscrimination testing is a government program that ensures that the plans serve all employees and not just the highest compensated employees. With this plan, the business has to provide a safe harbor match or contribution, which is when the employer puts a small amount into an employee’s 401(k) account. This enables both the employer and employee to contribute the maximum amount to the plan.
A few weeks after you purchase the plan, your company’s 401(k) will be ready to roll out to employees. Your provider will then provide you with an email that will be used to send details to eligible employees on how they can participate in the plan.
Many providers will also offer rollout meetings that will educate the staff on 401(k) benefits and answer any questions. There will also be instructions that contain information on how the owners and employees can select which percentage of a salary to contribute from each paycheck, choose which funds to invest in, and determine a beneficiary. When tax time rolls around, you may also receive tax credits and deductions for your business if you are eligible.
Jennie Wong is an executive coach, author of the e-book “Ask the Mompreneur“ and the founder of the social shopping website CartCentric.com. Email her at TheJennieWonggmail.com.