401K Guide: How to Structure the Best Plan for Your Employees

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To allure and keep top talent in today’s increasingly competitive employment market, including a retirement plan as part of your employee benefits package is an excellent idea for startups.

Offering 401(k) plans to employees has several advantages, but managing such plans is a somewhat complicated process. Suppose startups don’t adhere to all the regulations and requirements put out by the Internal Revenue Service (IRS) and the Department of Labor (DOL). In that case, they can easily put themselves at risk for penalties and audits.

To limit your liabilities and expedite the administration of your retirement plans, you may choose to add a 401k solution to your HR Tech stack. This guide is here to help you understand everything you need to know about the 401(k) retirement plan.

What Is A 401(K) Plan?

A 401(k) retirement plan is an employer-sponsored savings plan that enables employees to contribute a percentage of their wages on a pre tax basis to an investment account they may utilize when they retire. It was first introduced in the 1980s. The catchy name comes from a provision of the United States Internal Revenue Code (IRC).

Startups with at least one full-time employee (other than the owner) qualify to establish a startup 401(k) plan. 401(k) plans are different from traditional pension plans in that the employee’s salary goes straight to the plan. In a pension plan, the company guarantees a monthly payment to the retiree. One of the many significant 401(k) perks is that many employers will match contributions up to a particular percentage of your yearly pay, such as 4 or 5 percent.

How Does A 401(K) Work?

To encourage people in the United States to save money for their retirement, the US Congress introduced the 401(k) plan. One of the advantages they provide is a tax break to employees on the money they contribute. Employees might receive a tax credit on their contributions to a 401 k plan. It is pertinent to mention here that $20,500 is the maximum contribution for most people in 2022.

When an employee enrolls in a 401(k), they specify a percentage or after-tax dollars amount of their wages to be withdrawn from each paycheck and placed into their retirement account. Deducted funds are routed to a third-party administrator (TPA), who invests them according to the employee’s preferences. Some startups opt to match their employees’ 401(k) contributions to their plans as an inducement for their employees to join the plan.

The savings remain in the retirement account until the employee chooses to withdraw them. If they decide to withdraw money before the age of 59.50, they are liable to an early-withdrawal penalty. If an employee resigns, they take the money in their savings account with them. However, if the plan includes a matching contribution with a vesting timeline, they may not be able to take all of the employer’s pre-tax contributions with them.

Types Of 401 K

To fully understand this retirement savings plan, you need to know about the two main types of 401(k) plans, each of which has its own tax benefits.

Traditional 401(K)

Contributions to a traditional 401(k) come from an employee’s gross income. This means the money comes from the employee’s paycheck before the deduction of income taxes. As a result, the entire amount of contributions made throughout the year is deducted from the employee’s taxable income and is claimable as a tax deduction for that tax year.

Contributions and investment earnings are not subject to tax until the employee withdraws the funds, often at retirement. A traditional startup 401(k) plan costs between $500 and $3,000 per year to manage and keep records, depending on its features and the number of employees who take part.

Roth 401(K)

With a Roth 401(k), the employee’s contributions come out of their “after-tax” income, which is their salary after taking out the taxes. Consequently, there is no tax deduction for the year of the contribution. After taking out the funds at the time of retirement, neither the employee’s contribution nor the investment earnings are subject to further taxation.

Since you do not really pay taxes on the money you put into the plan, you have to pay taxes on it when you withdraw it. This includes both federal and most state income taxes. However, not all employers provide a Roth account option. If the Roth option is available, the employee may choose one or the other, or a combination of the two, subject to the annual contribution limit for tax-deductible contributions.

Do Startups Need 401 K?

Startups are in a constant war for top talent, not only against larger tech companies with better pay and benefits but also against other startups. Employees who join a startup are usually willing to give up some of the perks that come with working for a larger company, but they also know where the market is for startup benefits.

Both employers and employees can get benefits from a 401(k) retirement savings plan. Below are some of the major reasons why startups need 401(k) plans for their employees.

  • Joining the handful of small firms that provide more substantial retirement benefits, like 401 k plan, is a fantastic tactic for standing out and recruiting brilliant people to your corporation.
  • Employees (and Candidates) Anticipate Retirement Benefits and, even more so, access to a 401(k). Approximately 88% of employees seek access to a 401(k) when researching potential employers.
  • A 401(k) is also beneficial because startups can offer matching contributions or a commitment to match a percentage of an individual employee’s personal contributions as an incentive.
  • While individuals have access to various retirement planning alternatives, the majority of Americans obtain health insurance via their jobs. The same is true for tax-advantaged retirement plans.
  • Setting Every Community Up for Retirement Enhancement (SECURE) Act has made startup 401(k) programs more available to employers than ever before. The Act includes additional tax breaks for startup owners who are thinking about establishing their first 401(k), such as a $5,000 tax credit for three years to cover some setup and administration-related costs.

How Frequent Is It For A Startup To Offer A 401K?

According to some estimates, 90% of the startups do not offer 4019(k) to their employees. However, the numbers are increasing due to increasing awareness among entrepreneurs and employees. 

Moreover, details show that most seed stage startups do not offer 401 k plans while more or less 40% of series A companies do offer 401 k retirement saving plans. Additionally, more or less 75% of series B companies and almost 100% of series C companies offer 401(k) plans to their employees.

Why Should Startups Launch A 401(K)? (Major Benefits Of 401 K Retirement Plan)

The apparent justification for starting a 401(k) plan is to assist employees in saving for retirement. However, 401(k) plans may also assist your company in cost savings as well as in luring and keeping talent. Additionally, 401(k) plans are becoming simpler and more economical for small businesses to implement as a result of new tax benefits and contemporary technologies.

Are you a startup founder and considering providing your staff with retirement benefits? Here are some reasons why startups should introduce 401 k for their employees.

High Tax Credits

A new 401(k) plan’s startup costs might mount quickly. Congress just enacted the SECURE Act to make them more affordable for small enterprises. This Act extended a tax credit for opening a new 401(k) from $500 to $5,000 per year for up to three years—up to $15,000 total if eligible! The credit can’t be more than 50 percent of the startup costs needed to make, run, and train workers on the plan.

Additionally, the SECURE Act also added a new $500 credit (each year for three years) for setting up a plan with automatic enrollment. This gives employers an extra $1,500 to help pay for plan costs. While automatic enrollment increases plan participation, it may also increase expenses if your firm offers a match or profit-sharing plan.

Talent Acquisition And Retention

A 401(k) plan might make your business stand out from the crowd and boost the number of employment applications you receive. 401(k) plans may engage your current employees by reducing the financial and emotional load that comes with saving for retirement, in addition to helping businesses recruit top talent.

Finally, 401(k) plans can assist you in keeping high performers. Most businesses that provide profit-sharing or matching programs also set up a vesting schedule for these funds. A vesting schedule encourages employees to stay with your business for longer while your employer contributions are still partially vested. It also helps your business avoid losses if an employee quits.

Easy And Affordable

Historically, 401(k) service providers catered to powerful, large businesses. Exorbitant expenses and administration problems prevented many small organizations from adopting 401(k) plans.

Modern 401(k) providers provide 401(k) plans to small enterprises, covering most administrative work for a fixed charge. The correct 401(k) provider may help your business save money while enabling you to assist your workers in making better retirement plans, especially when combined with the new tax benefits introduced by the SECURE Act.

How Do I Start A 401(K) Plan For My Employees? What Do I Need For That

Once you’ve determined that a 401(k) plan is the best retirement plan for your startup, it’s time to set it up. There are many specifics involved in setting up and maintaining a 401(k), but to start, there are four essential procedures you must follow:

Find A 401(K) Plan Provider

Although you may manage a 401(k) plan on your own, hiring a plan provider to do so is considerably easier. A plan provider with more experience can handle the majority of the administrative work efficiently.

However, you should take your time to choose the best plan provider. We advise you to take the following factors into account while looking around for a plan provider:

  • Plan Fees: What kind of fees does the service provider charge you and your employee? Reducing fees can have a significant influence on the retirement savings of your workers. If you do not know about the costs associated with 401(k) plans, the United States Department of Labor provides a site to educate you.
  • Payroll Integration: Locating a 401(k) plan provider that interacts with your payroll provider can reduce administrative duties by enabling convenient, automated payroll deductions.
  • Minimum Number of Participants: Does the service provider mandate a minimum number of participants? If so, you’ll need to know that upfront since if the quantity exceeds what your organization can handle, you may want to avoid them.
  • The excellence of the firm: What is the provider’s financial situation, and do they have the skills and credentials to handle 401(k) plans? Are there any pending lawsuits against them? Do they have insurance for fiduciary liability? You must check all these things before choosing a 401k plan provider for your startup.

Even after you’ve chosen the service provider, you’ll need to monitor your plan provider to ensure that it remains the optimal option. You need to:

  • Frequently evaluate their performance
  • Read plan documents
  • Verify the exact charges levied
  • Examine updated versions of their contract and rules and procedures.
  • Monitoring participant complaints

Choose Your Employer’s Contribution

Employer contributions are one approach to encourage employees to participate in the 401(k) plan you’ve created. With an employer contribution, you deposit funds into the retirement accounts of your employees. Contributions from employers are an important benefit for employees. Along with employer contributions, employee contributions are also crucial for an effective 401 k plan. Financial advisors often suggest as investment advice that employees must contribute to their 401(k) plans by putting in at least enough money to get the full employer match.

With a traditional 401(k) plan, you may have the following main contribution options:

Non-elective contribution: You pay a portion of an employee’s salary to their retirement account regardless of whether the person contributes.

Matching contribution: You give the same amount to the employee’s account as the employee contributes. You don’t have to match their contribution exactly; instead, you might decide on a matching rate that works for you.

If you choose a non-elective contribution, you will make a retirement contribution for each plan member, regardless of whether they make any contributions to their retirement account. For instance, you may opt to make a non-elective contribution of 1 percent and contribute 1 percent of their pay to their retirement account. They will receive the money regardless of whether they participate in their own retirement plan.

If you choose a matching contribution, you will contribute an amount equal to the employee’s contribution. Say that for every $1 they contribute to their 401(k) retirement account, you will contribute an additional $0.50. You can also restrict the amount that you will match. You may choose to contribute up to a particular proportion of an employee’s income.

Create Your Vesting Schedule

After you decide to contribute to your employees’ 401(k) plan, you will need to establish a vesting schedule. Any contributions an employee makes to their plan are immediately vested. They can take the money with them at any point if they leave the firm.

Any contributions you make on their behalf to a traditional 401(k) plan vest in accordance with your vesting schedule over time. You may opt to have your employees become fully vested after a specified length of service. For instance, they are not fully vested until they have worked for your firm for four years, at which point they are fully vested.

Another alternative is to vest your contribution gradually. For instance, after one year with your startup, they may be 25% vested and afterward vest at a rate of 25% each year until they are 100% vested.

Disclose Information About The Plan To Your Employees

Once you’ve set up a 401k plan, you’ll need to inform your employees of this decision. A concise plan description can aid in this endeavor. This informs your employees of their rights and obligations under the plan, as well as what to anticipate from the plan.

In the brief plan description, you must provide the following:

  • How and when do employees become eligible?
  • Employer and employee plan contributions
  • Vesting schedules
  • When employees are eligible to receive perks
  • How to submit a request for benefits
  • Employee Retirement Income Security Act (ERISA) obligations and rights 

Make sure you’ve prepared the explanation of the plan in clear language and answered any queries the employees could have if you want to persuade them to take part in the program.

How Much Time Does It Take To Have A 401K In Place?

Implementing a 401(k) plan for a startup normally takes between 30 and 45 days on average, depending on the complexity of the plan. The process of switching from one financial provider to another when an existing plan is involved might take as long as 60 to 65 days.

Top 401K Providers In The US

If you operate a small business or are intending to begin a startup, be sure to offer an attractive 401(k) plan to your employees. Be aware that, as an extra benefit, employer contributions to such programs are deductible on your company’s federal income tax return, subject to internal revenue service (IRS) restrictions.

However, it might be tough to determine which financial institution to engage with for a 401(k) plan. Here are some of the top 401 k plan providers to consider when selecting a financial services firm to administer the retirement plan for your startup.



With more then 80 years of experience in the retirement planning industry, T. Rowe Price is a well-respected name when it comes to 401 (k) retirement plans. It offers plan participants access to more than 100 mutual funds and a wide range of funds from other companies, so they can invest the way they want.

  1. Rowe Price’s support for a variety of investment strategies is a key advantage. You may utilize it to provide a 401(k) plan, a 457(b) plan, a 403(b) plan, and even a defined benefit plan.


  • Diverse investment possibilities
  • Protracted legacy in the retirement plan sector
  • Multiple plans are available


  • Uncertain fee structure


  • varies by the complexity of the 401 k plan

Charles Schwab

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Charles Schwab is another significant player in the financial services sector. It provides a number of retirement plan alternatives for startup owners, including the more straightforward SEP and SIMPLE individual retirement account (IRA) options, in addition to 401(k) plans.

Accounts with the broker demand no minimum deposit, making it easy to get started. Furthermore, it’s renowned for keeping costs down. For instance, the Solo 401(k) plan and the SEP IRA do not have any maintenance costs.

Access to retirement planning tools and guidance, as well as 24/7 service and support, is another advantage that might be valuable to your employees.


  • Low-cost investments and maintenance costs
  • Multiple account types are available
  • Tools for retirement education and planning
  • 24/7 support


  • There is no disclosure of costs associated with 401(k) plans for startups.


  • Depends on company size and plan requirements


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ADP is a business services platform that offers more than 401(k) services. Entrepreneurs may also utilize the company’s payroll, insurance, human resources, and tax services. This makes it attractive to startups who need a one-stop shop for all their requirements.

The firm’s 401(k) service is reliable, with transparent costs and access to over 13,000 investment possibilities.


  • One-stop location for business services
  • Transparent fee structure
  • Adaptability in selecting plan characteristics


  • Fewer investment choices than competitors


  • Monthly $160 + $4 per member and $20.83 investment fees or 0.10% of qualifying plan assets


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Managing investments may be challenging, so some investors utilize robo-advisors for assistance. Computer programs that handle investments on your behalf are known as robo-advisory services.

If your employees choose a hands-off approach to investing, Betterment’s 401(k) robo-advisory service may appeal to you. Betterment provides additional services, including interfaces with major business tools, payroll programs, and a dashboard for monitoring your startup’s financial KPIs.


  • 401(k) robo-advisory service
  • Integrations with other enterprise tools


  • Fees may exceed those of the competition


  • Monthly: $42 to $125 fixed cost in addition to $5 to $6 per participant


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Vanguard provides some of the industry’s lowest expense ratios, such as a whole stock market index fund with a cost of only 0.02 percent. If you want to offer your employees access to passively managed index funds that allow them to invest with minimal expenses, Vanguard might be an excellent choice for you.

It also provides low-cost target-date funds, which make it simple for your employees to select assets and tailor their retirement savings to their anticipated retirement years.


  • Plan administrators are charged a flat rate with no asset-based fees.
  • Investment at a low cost for participants
  • Many account types are available


  • Instead of serving as an administrator, it collaborates with third-party administrators


  • One-time setup fees, in addition to yearly payments dependent on the number of members


Now that you know the basics, you are almost ready to create a 401(k) plan for your startup. Review this guide and answer the questions above, and you’ll be ready to talk about your 401(k) with a solid plan in hand.

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Shanzae Solangi is an enthusiastic content writer with expertise in SEO and keyword research. Her bachelor’s degree in Clinical Psychology mixed with her adept writing skills allows her to successfully enter into the targetted audiences’ mind and create content that could help companies generate leads. Shanzae’s adaptable skills, eagerness for learning and communication skills are the reason for her quick success in the world of content writing. Besides creating powerful content that drives companies' online growth, she holds an administrative role, managing and overlooking several different websites.

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