If you are a small business owner, it's likely that you already possess expert knowledge in the products or services you provide. Just as likely, however, is that you are less knowledgeable when it comes to designing a 401k for your employees. While a 401k is fairly straightforward once it is put into place, choosing the best possible one for your business will depend entirely on your professional and financial goals. Instead of settling for an arbitrarily designed plan, keep the following things in mind as you work to design your own.
The first thing you will need to consider as a small business owner is the parameters of employee eligibility. Many employers allow employees to enter the plan as soon as they begin working, while others may prefer to restrict eligible contributions in certain ways, such as age or length of tenure. If your business is part of an industry or sector that regularly experiences high turnover, for example, then you may want to opt for stricter terms of eligibility. Conversely, more generous terms are often attractive to potential employees where their services are in demand.
There are different kinds of contribution schedules and ways to approach them, but many small businesses who make talent attraction a priority favor matching contributions. If you and your team are leaning toward offering matching contributions, then you will also want to discuss the match rate and whether or not this rate will vary from year to year. Furthermore, if you do plan for the rate to vary, you will want to make the basis for it clear to employees who are participating in the plan. Long-term employees value clarity and transparency when it comes to contribution schedules.
Another thing to consider is how the vested portion of the 401k will be distributed to employees once they leave their position with your company. Most plans feature automatic lump-sum distributions, so that the employee receives the total amount of their vested portion all at once. However, this is far from the only option available. Your business may prefer to design a plan in which a plan's funds are distributed in regular installments over a defined period. Some small businesses design plans in which employees who are nearing the age of retirement can have their plan's funds distributed to them while still employed. While this is less common, it is yet another part of 401k plan design that often goes overlooked by small business owners.