How To Set Up a 401K for Your Employees

One way the employee-friendly organization shows its character is by setting up retirement plans for the post-retirement requirements of their employees. Unlike the traditional fixed regular income pension plans, plans such as the 401(k) is about involvement by the employees, by investment of their salary and decision-making regarding such investments. It is often referred to as a profit-sharing plan but is not actually a plan, which gives the employee a share of the profits.

When an organization wants to set up a 401(k) plan for its employees, how does it go about it?

These are the basic steps:

1. Statement of the basic aims and objectives of the plan: Once you have clarity on what you are seeking from a retirement plan, you will be able to deal with the choice decision better. Not only will having clarity help with the decision-making, it will help in the implementation of the plan too. Some questions, the answers to which will guide you in establishing your goals for the plan would be:

  • Are only the employees going to be contributors or will the organization also participate with a matching plan contribution?
  • What will be the contribution from - pre-tax or post-tax?
  • What is the employee profile, which should participate in the plan?
  • What should qualify the employees for the plan?
  • Will loans be allowed for participants against the plan contribution?

2. Choice on the plan scheme: There are choices on the plans and the organization should look to all providers of such plans and then put together a request for proposals, which will have questions requiring answers from these providers. Your RFP document would require clarification on quality and diversity of the funds, the expenses involved in administration, technology etc.

Based on the different documents submitted, review the proposals either in-house or with the help of external consultants. Before taking on a consultant for the job, it is essential to confirm that they don't have any attachment to the corporate, which manages their mutual funds. The finalizing on a plan should be after due consideration of the proposals and reference checks. The plan is normally structured on three central platforms -Annuity, Mutual Fund and Trust. The plan which suits your objectives and requirements best, must be chosen from one of these after due analysis of the positives and negatives of each.

3. Choice of the plan trustee: You might want to have a Third Party Administrator to manage the selected plan, which would increase the administrative expenses of your plan. Thus an external expert can be the trustee or a team from within can be entrusted the job of managing the plan.

4. Build a good record keeping system.

5. Communication to the employees for plan participation: Once the team or the trustee has an option on plans to offer the employees, then the communication team communicates to the employees. The communication has to go to those employees who are eligible and qualify under the plan qualification criteria. The team will basically have to educate the potential participants on the plan options. Employees can also seek investment advice from the employers on the investment, on their retirement needs, etc.

A clear and thought out 401(k) plan will not only serve as a potent instrument in helping create financial security during retirement, it also will help in attracting fresh and good talent to your organization.


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