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How To Set Up Your Small Business 401(k) in 3 Easy Steps

David Ramirez
December 19, 2023
How To Set Up Your Small Business 401(k) in 3 Easy Steps
Table of contents

How To Set Up Your Small Business 401(k) in 3 Easy Steps

Considering establishing a 401(k) plan for your small business?

Implementing a 401(k) is a strategic move, not only as a valuable employee benefit but also as a mechanism that can yield significant advantages. for your business.

Navigating the early stages of this process might seem complex at first glance. Rest assured, however, that setting up a 401(k) for your small business is more straightforward than it initially appears.

Drawing on our founders' extensive experience, which includes managing over $55 billion in retirement investments, we've distilled the process into three clear and manageable steps. By the end of this article, you can launch a 401(k) plan that positively impacts your business and ensures your employees' retirement security.

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

A 401(k) plan can be a valuable benefit to both employers and employees. To maximize the utility and efficiency of this retirement plan, it’s essential to have distinct objectives for implementing it.

Here are three of the most compelling reasons driving today’s business owners to establish 401(k) retirement plans for their small businesses:

To maximize savings for business owners or key employees

Sheltering money from income taxes and allowing it to grow over time is a powerful way to build wealth. For some small businesses, owners and key employees must be able to make significant contributions to their plans.

Clarifying this goal is crucial to achieving the $56,000 contribution limit—and potentially enhancing the company's retirement-related tax benefits. Understanding this helps you select ideal partners and plan investments.

To attract and retain talent

Attracting and retaining talent is one of the most common reasons small businesses start 401(k)s. In WTW’s 2022 Global Benefits Attitudes Survey, 47% of respondents listed retirement plan benefits as an important reason for joining their company versus a competitor. More recently, a 2023 Schwab study found that 88% of employees indicated a 401(k) was a "must have benefit" when looking for a new job.

The WTW study also found that nearly 60% of employees stay with their company because of their retirement benefits package.

To do right by their employees

One-third of working-age Americans—about 58 million people—have no retirement savings, according to a recent study. For three out of four people, their greatest financial regret is not saving enough for retirement. Add to this 92% of employees who feel stressed about their finances, and the importance of financial wellness benefits is clear.

A 401(k) optimized for employee savings can greatly impact employee well-being. Studies show reducing financial stress can even increase productivity. Consider features such as matching contributions and allowing catch-up contributions to boost participation.

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

Getting your small business 401(k) up and running is largely a matter of connecting with the right partners. To start, it helps to understand the different stakeholders involved in a successful 401(k):

401(k) recordkeepers

A recordkeeper is what most people think of when they hear the term “401(k) provider.” Essentially, they are your 401(k)'s bookkeeper, making them the most important 401(k) partner—running a 401(k) without them would be nearly impossible for small business owners. Their job is to oversee employees' accounts and plan documents, and take care of day-to-day operations such as tracking enrolled employees, what investments they own, and how money flows in and out.

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 your system can make a big difference in the complexity of running a compliant plan.

Each payroll cycle requires employees’ salary deferrals to move from the payroll system to the recordkeeper, whose system allocates them to individual retirement accounts. This data transfer is often manual—downloading a file from the payroll system, reformatting it, and 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 (TPA)

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 managing all this sounds daunting, don’t worry—advisors are here to help. Exceptional 401(k) advisors assist in various ways, including:

  • Building and monitoring an optimal, cost-effective lineup of mutual funds and other investments
  • Assuring legal compliance to protect you from potential lawsuits
  • Guiding employees’ funds into suitable investments
  • Serving as an easily-accessible source of financial advice for your employees
  • In select cases, they might take on administrative work, sign Form 5500, and assume legal responsibility for plan administration
  • Benchmark your plan and keep your 401(k) fees, such as management fees and individual service fees, down as your plan's assets grow

If you want to save money and simplify setup, a seasoned advisor with 401(k) expertise can bear much of this burden. Just be sure to choose financial advisors carefully.

"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_ERISA-Record-Retention-Requirements




  -Carol Buckmann, Founding Partner, Cohen & Buckmann

Step 3: Build Your Small Business Retirement Plan

Once you understand what you want to achieve and who is involved, you can begin developing your plan. Building a small business retirement savings plan consists of two main steps:

Plan design

Plan design pertains to the specific features and rules of your written plan document. How you design your plan determines its ability to achieve your goals. There are many considerations you'll have to make once you've reached this stage, but here are a few of the most critical:

  • 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? Under the Secure Act 2.0, all plans starting in 2024 will be required to automatically enroll participants beginning in 2025?
  • Will your 401(k) meet the IRS’s Safe Harbor 401(k) provision, exempting you from specific compliance tests that may limit contributions for small business owners or key employees?

2. Building the fund lineup

By “fund lineup,” we mean the array of investment options available to plan participants. Getting this right is arguably the most critical part of building a successful 401(k) plan.

Offering risky, underperforming, or unnecessarily expensive mutual funds could significantly curtail your employees’ retirement account savings and even put you in the crosshairs of costly lawsuits.

If you need help assembling a stellar 401(k) fund lineup that shields you from legal pitfalls, consider hiring an advisor. The competent ones not only handle this task but often assume legal responsibility for it as well.

Tips for Setting Up a 401k for Small Business Owners

While starting a 401(k) for your small business can be fairly straightforward, 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 helpful tips gathered from our years of experience:

1. Integrate your recordkeeper with payroll

Running a 401(k) is a lot of work! Managing and keeping a retirement plan compliant can be a tall order for a small business with limited resources.

To simplify the process, ensure your provider supports 401(k) payroll integration. Integration automates the deposit of employee contributions, monitors employee eligibility, and performs checks to resolve discrepancies, thereby streamlining plan administration.

2. Ensure your payroll system scales

If you opt for payroll integration for your 401(k), make sure it remains functional as your business scales up. Most companies need to upgrade payroll systems around the 50-employee mark due to escalating compliance and reporting demands. If your chosen provider lacks integration capabilities with systems suitable for larger businesses, a provider switch—which can be incredibly inconvenient—might be necessary.

3. Be prepared for the large plan audit

Once the number of employees in your plan passes the 100 mark, an annual 401(k) audit. Those with experience will affirm that these examinations can be costly, time-consuming, and a significant nuisance. Be sure to partner with a 401(k) provider capable of handling these audits.

4. Learn how to pass nondiscrimination testing

Each year, the IRS requires plans to undergo nondiscrimination testing. These assessments ensure your plan doesn’t favor business owners or highly-compensated employees (HCEs). These tests can significantly limit how much your owners or HCEs can contribute, so you’ll want to take proactive steps and partner with providers who can assist you. Learn more about this in our guide on nondiscrimination testing.

Future-proof Your Company and Employees With ForUsAll

There you have it: three simple steps to set up a 401(k) for your small business. Just determine why you want a 401(k), select the right plan provider, and get started.

Feeling overwhelmed? We're here to help. With our handy 401(k) shopping checklist, determining the best 401(k) provider for your small business is a breeze. Learn more about the ForUsAll 401(k) or contact us with any questions.

The modern 401(K) built for your business. Learn more.

Download the 2023 Safe Harbor Guide
Understand new rules for 2023, benefits of Safe Harbor and strategies to minimize Safe Harbor costs.
David Ramirez
About Author -
David Ramirez

David Ramirez, CFA, is a recognized 401(k) expert with over 20 years of experience in 401(k), ERISA, cash balance plans, and ESOPs. A UC Berkeley graduate, he played a pivotal role at Financial Engines, a 401(k) advisory firm founded by Nobel Laureate William Sharpe, Ph.D., where he was a portfolio manager who helped manage over $50B in 401(k) assets.  His clients included some of the largest Fortune 500 companies and state governments.

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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.