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How Employers Should Choose a 401(k)

Benefits of a 401(k) Plan

So employers have a number of different choices when you choose a 401(k) plans that they could offer their employees. The best way to make that decision is to consult with their accountant or tax advisor but a number of factors will determine their choice:

  • Eligibility

Large businesses don’t need to consider SIMPLE 401(k) plans. Multiple Employer plans are unlikely to suit them either. Companies that aren’t eligible for particular kinds of plan will have fewer choices.

  • Salary Levels

One of the choices that companies offering a 401(k) plan will need to make is whether to offer a Roth 401(k) or a traditional 401(k). Should they let employees pay taxes before making their contribution? Or should they allow them to defer their taxes until they start receiving their payouts? Or should they do both?

One factor that will weigh on that decision will be the salary levels at the company. A company with young, low-paid staff might prefer to offer a Roth 401(k). Their staff will be able to pay their taxes at their current low rates before their income—and their marginal tax rate—rises.

  • Competition

A 401(k) plan is a benefit that a company offers to attract and serve its employees. The attractiveness of that benefit will depend on what other companies are offering. Part of the process of creating a 401(k) plan will be looking at the 401(k) plans at similar companies competing for the same pool of potential employees.

That research will include listing the types of 401(k) plan available but also at the degree of matching contribution and the vesting time.

  • Cost and Complexity

Finally, while setting up some sort of retirement plan will be essential whether you work for yourself or own a small business, that plan will cost money. It will add to the cost of your employees and it will mean filing additional paperwork. The more complex the plans you offer, and the bigger the contributions you want to make, the more work and expense the plans will involve.

And, of course, once you’ve decided which types of 401(k) plans you want to offer you’ll still need to choose the funds in which you want to make the investments.

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