Choosing the best 401k for your business is easy – if you know how to do it
What type of 401k will work best for your business? With so many plans available at your fingertips, do you think you know how to pick the best 401k for your small business? If you are at a loss on how to do this right, here are some basic information that can help you make a more informed decision.
Benefits of starting a 401k for your small business
A well-designed 401k [3] can help your business in more ways than one. It can:
• Help promote financial security during retirement
• Attract talented employees and increase your chances of keeping them
• Make you eligible for appropriate tax deductions
• Ease administrative responsibilities when your employees leave the company
Basically, there are three core 401k plans to choose from – the Traditional 401k, the Safe Harbour 401k and the Tiered Profit Sharing 401k. How does each one differ from the other and which one will best serve your interests? Here are some things you need to consider.
Traditional 401k
The traditional 401k is the most flexible option among the three. It works best for highly seasonal businesses and/or for businesses whose employees are willing to contribute more than 7% of their salaries. By choosing to go for a traditional 401k, you can choose whether to make contributions on behalf of all your employees or match your employees' deferrals. You can even choose to do both. Contributions made under this option can either be subjected to a vesting schedule or vested immediately at your discretion. However, while this option does not require you to make a matching contribution, it is subjected to ADP and top-heavy testing.
Safe Harbour 401k
This option is perhaps the best choice for businesses with less than 15 employees since it allows you to contribute the maximum deferral amount to your account while automatically satisfying non-discrimination testing.
Tiered or Advanced Profit Sharing 401k
The tiered or advanced profit sharing 401k may be the best option for businesses that enjoy handsome profits, employs no more than 50 people and have unique employee groups with different roles and compensation levels working within the organization. In such cases, different profit share percentages can be awarded to each group.
Tips on choosing the best option
• Design your plan to encourage maximum savings from your employees. Consider using automatic enrolment and auto-escalation features to achieve this goal.
• Consider unbundled plans to reduce costs and improve flexibility. Choose a qualified investment advisor [4]to help you design and manage such a plan.
• Diversify. Offer a number of investment options to choose from. Make sure you include asset classes that don't move in the same direction to reduce volatility.
• Provide professional financial education for your employees.
Taking into consideration the numerous benefits that can be derived from starting a 401(k), don't you think it's about time you choose the best 401k for your business? You definitely should.