The 3 Step Process to Set Up a 401(k) for Small Business

April 10, 2019
8 min read
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Starting a Small Business 401(k) is Easier Than You Think

So, you’re thinking of setting up a 401(k) for your small business.

On behalf of everyone here at ForUsAll, congratulations! The 401(k) is an awesome benefit that can do some great things for your business and your employees, so starting one is a big step forward.

If you’ve spent any time looking into this process however, you’ll likely have realized that it’s not exactly clear how to start a 401(k) for your small business.

But not to worry. We’re here to tell you that setting up a 401(k) for your small business is a lot easier than you’d think.

Drawing on our founders’ countless years of experience managing over $55 billion in retirement investments, we’ve broken the process down into 3 simple steps. By the end of this post, you’ll be well on your way to starting a 401(k) that benefits your business, and more importantly, sets you and your employees on the path to a successful retirement.

Ready to get started? Let’s jump in!

Step 1: Get Clear on Why You’re Offering a Small Business 401(k)

The 401(k) can be a very powerful benefit for you and your employees. In order to ensure that you’re getting the most value you can out of your 401(k), you’ll need to be clear on your reasons for starting one. Here are 3 of the most compelling reasons why so many business owners nowadays are setting up a 401k for their small businesses:

1. To Maximize Savings for Business Owners or Key Employees

Sheltering money from income taxes and allowing it to grow over time is a very powerful way of building wealth. And for some small businesses, it’s especially important that their owners and key employees are able to contribute as much of their income as they can to the retirement plan. In order to reach the annual contribution limit of $56,000 - and potentially push the company’s retirement tax benefits even higher - you’ll need to be clear on this objective so you can choose the right partners and optimize your plan design accordingly.

2. To Attract & Retain Talent

Attracting and retaining talent is one of the most common reasons small businesses start 401(k)s. And for good reason, too.

According to a study by Willis Towers Watson, 18.2% of employees rated their employer’s retirement plan as being very important to their decision to work for their current employer versus a competitor.

The same study also found that employees who rated their company’s plan as being very important were 2.5x more likely to stay with their current employer than those who didn’t.

All of this is to say that a 401(k) with the optimal setup can be very helpful for attracting and retaining talent.

3. To Do Right by Their Employees

According to the National Institute on Retirement Security, over 38 million working age households have zero retirement savings. With life expectancy getting longer and longer, it’s crucial that your employees have enough saved for a comfortable retirement.

Given that saving for retirement is the #1 source of financial stress for Americans, a 401(k) optimized for employee savings could have a big impact on their quality of life. Studies show reducing financial stress may even make them more productive at work.

In addition to all the aforementioned benefits, 401(k)s can also earn your small business some major tax credits!

Once you’re clear on your reasons for starting a 401(k) and what you need it to accomplish, you’re ready to move on to step 2.

Step 2: Find the Right Partners for Your Small Business Retirement Plan

Starting to get a 401(k) for your small business is as easy as reaching out to the right partner and getting the process started. But before you do that, it helps to first understand all the different partners that come together to make a successful 401(k):

401(k) Recordkeepers

A recordkeeper is what most people think of when they hear the term “401(k) provider.”

The recordkeeper is essentially the bookkeeper of the 401(k). Their job is to keep track of who’s in the plan, what investments they own, and what money is going in and out. They’re arguably the most important of the 401(k) partners. Without a recordkeeper, running a 401(k) is near-impossible for a small business.

Here’s a list of the top recordkeepers for small businesses. Feel free to take a look! You can also use our 401(k) shopping checklist to help you evaluate which recordkeeper is right for you.

Payroll Systems

Payroll isn’t usually the first thing people think of when they hear “401(k)”, but what system you use actually makes a big difference in how much work goes into running a compliant plan.

Every time you run payroll, your employees’ salary deferrals have to move from your payroll system to the recordkeeper, where they’re then distributed into your employees’ retirement accounts. This process often happens manually, with someone at your company downloading a file from your payroll system, reformatting it, and then uploading it to the recordkeeper. Some payroll systems integrate with your recordkeeper so this work happens automatically, saving you time and minimizing the risk of a costly compliance mistake.

Third Party Administrators

There’s a lot of administrative work that goes into a 401(k). These are things like maintaining the plan document, preparing the annual Form 5500, creating match & profit sharing calculators, and performing IRS nondiscrimination testing. A third party administrator (TPA) takes these tasks off your plate. These days, it’s common for the recordkeeping institution to also act as an administrator (i.e. a “bundled” solution), eliminating the need for a separate TPA.

401(k) Advisors

If all of this so far seems like a lot, that’s because it is! Luckily, this is where advisors come in. Good 401(k) advisors do a lot of things to make your 401(k) easier and more effective. These include…

  • Building & monitoring an optimal, low-cost lineup of mutual funds and other investments
  • Shielding you from costly lawsuits by assuming legal responsibility for your investments
  • Ensuring your employees’ balances are allocated into the appropriate mutual funds and investments
  • Being an easily-accessible source of financial advice for your employees
  • In some rare cases, they may even take the administrative work (TPAs don’t do everything) off your plate, sign Form 5500 for you, and assume legal responsibility for plan administration
  • Benchmark your plan and keep your 401(k) fees down as your plan assets and employee count grow

Most notably, a good financial advisor with 401(k) expertise can do all the heavy lifting involved in setting up a 401(k) for your small business. So if you’re feeling overwhelmed, or simply want this process to go as easily as possible, talk to an advisor today! But make sure it's a good one...

"A mistake I often see is for people who are looking to adopt a plan to hire relatives or friends without investigating their professional qualifications. In evaluating an advisor, consider performance, responsiveness, and be sure they communicate well, and most importantly, that their fees are reasonable given their level of service."


  -Carol Buckmann, Founding Partner, Cohen & Buckmann

Once you’re clear on your goals and have brought on the right partners, it’s time for the fun part… building your plan!

Step 3: Build Your Small Business Retirement Plan

The process of building your plan can really be broken into two main parts:

1. Plan Design

Plan design pertains to the specific features and rules of your plan. How you design your plan determines how well it can achieve the goals you set for it. We don’t want to get too into the weeds today, but here are a few important things you’ll have to decide during the plan design phase:

  • Will your small business 401(k) include an employer contribution?
  • Will your employer contributions have a vesting schedule?
  • When will eligible employees be eligible to join the 401(k)?
  • Will your small business 401(k) allow for roth contributions?
  • Will your small business 401(k) use automatic enrollment?
  • Will your 401(k) meet the IRS’s Safe Harbor 401(k) provision, which exempts you from certain compliance tests that may limit contributions for small business owners or key employees.

2. Building the Fund Lineup

When we say “fund lineup”, we’re referring to the menu of investment options that are available to plan participants. Getting this right is arguably the most important part of building a successful 401(k) plan.

Having risky, poorly-performing, or unnecessarily expensive mutual funds can significantly limit the amount your employees have in their accounts come retirement. It may even expose you to costly lawsuits.

If you feel any uncertainty around how to build an optimal 401(k) fund lineup that’ll protect you from costly lawsuits, consider hiring an advisor. Not only do the good ones take this off your plate, but they’ll even assume legal responsibility for it as well!

Tips for Small Businesses Looking to Set Up a 401(k)

While starting a 401(k) for your small business can be fairly simple, there are a few things you’ll want to keep in mind to avoid any retirement plan headaches down the line. Here are a few simple tips we’ve learned over the years:

1. Make Sure Your Payroll System Integrates With Your Recordkeeper

Running a 401(k) is a lot of work. Trust us, we run a lot of these. As a small business with limited resources, running a retirement plan and keeping it compliant can be a tall order. That’s why we recommend a good 401(k) payroll integration, which will automatically deposit employee contributions, track employee eligibility, and run validation checks to resolve any discrepancies that might put your plan out of compliance. These integrations make plan administration way easier, so be sure that your provider offers one.

2. Make Sure Your Payroll Integration Scales With Your Business

If you do get a payroll integration for your 401(k), you’ll want to be sure that it works as your business scales up. Most businesses need to upgrade to new payroll systems around the 50 employee mark, as this is when compliance and reporting needs become too complex for simple small business payroll systems to handle. If the provider you choose doesn’t integrate with payroll systems suited for larger businesses, you may need to change providers. And trust us, doing this can be a huge hassle.

3. Be Prepared for the Large Plan Audit

Once the number of employees in your plan passes the 100 mark, you may have to undergo an annual 401(k) audit. As anyone who’s ever been through one will tell you, these are a huge hassle that are costly and can eat up a ton of time. So our advice? Be sure to partner with a 401(k) provider that takes point on 401(k) audits.

4. Learn How to Pass Nondiscrimination Testing

Each year, the IRS requires plans to undergo nondiscrimination testing. These are tests designed to ensure that your plan isn’t favoring business owners or highly-compensated employees (HCEs). These tests can place big limits on how much your owners or HCEs can contribute, so you’ll want to take proactive steps and partner with providers who can help you pass your testing. Learn more about this in our guide on nondiscrimination testing!


And there you have it: 3 simple steps to set up a 401(k) for your small business. Once you’ve gotten clear on why you’re setting up a 401(k), all you have to do is find the right partner, and then get to building your plan!

We tried our best to simplify this down, but if you’re still feeling overwhelmed, not to worry… we’re here to help! Most sponsors that we talk to run into the most difficulty in finding the right partners, so we put together this helpful 401(k) shopping checklist, so you can easily evaluate which providers are right for your business. Feel free to take a look!

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David Ramirez - CEO at ForUsAll
Justin Pappan

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This material has been prepared for informational and educational purposes only and should not be construed as a recommendation by ForUsAll, Inc., its affiliates or employees (collectively, “ForUsAll”)  to activate a cryptocurrency window or invest in crypto.  Investing in crypto can be risky and investors must be able to afford to lose their entire investment.  You should consult with your own advisers before activating a cryptocurrency window or investing in crypto.  ForUsAll does not provide legal, tax, or accounting advice. Please refer to your Plan's fee disclosure for more details.© 2023 ForUsAll, Inc. All rights reserved.
1 Schwab 2022 401(k) Participant Study - Gen Z/Millenial Focus, October 2022.
2 As of 12/31/2022. Employees include both current employees and terminated participants with a balance.
3 "Morgan Stanley At Work: The Value of a Financial Advisor" Morgan Stanley, March 2022.
4 Sarah Britton was a client when she provided this testimonial through an independent third party review website. She received no compensation for her remarks. There are no known conflicts of interest in the provision of her comments related to the services provided.