401(k) Plans for Small Businesses
This publication provides an overview of 401(k) plans and includes helpful resources for you and your employees.
There are thousands of investments out there, from fairly basic, low maintenance choices to more complex financial instruments. Whatever you choose, make sure you’re comfortable with your decisions, and that over time, the investments continue to be in the participants’ best interest.
When considering plan investments, a key plan design decision you’ll make is whether to permit the participants to direct the investment of their accounts or whether you (or someone you hire) will manage the monies on their behalf.
If you allow participants to direct their 401(k) investments, you must decide what investment options to make available and take steps regularly to make participants aware of their related rights and responsibilities. This includes providing plan– and investment–related information, including information about fees and expenses that participants need to make informed decisions about the management of their individual accounts.
You (or those you hire) must provide that information to participants periodically, including before they can first direct their investment in the plan. The investment–related information needs to be presented in a format, such as a chart, that allows for comparison of the plan's investment options. A model chart is available to help you provide this information.
If properly executed, this type of plan limits your liability for participants’ investment decisions.
You can also help your employees save for retirement, and limit your liability, by using auto-enrollment and qualified default investment alternatives.
Auto–enrollment plans automatically enroll employees in a 401(k) plan. A specified percentage of the employee’s wages are automatically deducted from each paycheck and then contributed to their plan. While the employer sets the percentage, there is some flexibility built into these plans:
- The automatic contribution amount can remain the same each year, or you can set up the plan to increase the employee’s contributions over time to further increase their savings.
- Employees can choose not to participate, or they can select a different contribution percentage.
- You can add to your employees’ accounts by contributing a specific amount, matching your employees’ contributions, or both. This can provide significant tax advantages, including deductions for employer contributions and deferred taxation on contributions and earnings until distribution.
You can simplify the selection of investments in an auto–enrollment plan by automatically investing employee contributions in certain qualified default investment alternatives (QDIAs). QDIAs, such as balanced funds and target date funds, generally offer high rates of return over the long term.
If carried out properly, you can limit your liability for any losses that result from investing participants' contributions in these default investments. Remember, you still are responsible for prudently selecting and monitoring these default investments.
More Resources
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Automatic Enrollment 401(k) Plans for Small Businesses
This publication provides an overview of automatic enrollment 401(k) plans.
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Target Date Retirement Funds – Tips for ERISA Plan Fiduciaries
This general guidance assists plan fiduciaries in selecting and monitoring TDFs and other investment options in 401(k) and similar participant–directed individual account plans.
