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401(k) Setup - What to Expect?

Uncover the key steps and considerations involved in setting up a 401(k) plan to secure your financial future.

Many businesses are hustling to establish a 401(k) plan for their employees as we approach Q4. In general, this is because the first year of a new safe harbor 401(k) plan must be in place for 3 months, making October 1st the deadline.

As many know, a 401(k) plan is a great tax benefit for business owners and an excellent overall benefit for employees. However, for a small business, the setup can be confusing and somewhat cumbersome if you don’t understand the moving parts.

We’re here to dispel all the confusion, including:

Who is involved? (And what do their confusing names mean?)
What are my fees?
What tax credits are available?

Keep in mind, that this guide is for businesses that have under 100 employees as the rules change when you cross that threshold.

Who is involved?

Sponsor
Third-Party Administrator (TPA)
Investment Advisor
Record Keeper
Custodian

The Plan Sponsor is generally the Employer. In some instances, it could be a union, a group of representatives, or a key executive. The Plan Sponsor will make key decisions for the plan, oversee service providers, and ensure the plan is operating properly. As a Plan Sponsor, you are a “fiduciary” of the plan, which means that you take legal responsibility for making decisions on behalf of plan participants. The Plan Sponsor generally outsources the administration of the Plan to a Third-Party Administrator (see below), but even in doing so, the Plan Sponsor is not relieved of its fiduciary duty to Plan Participants.

Third-Party Administrator (TPA)

The TPA provides technical support to the plan. Initially, they will help construct the plan and generate the legal plan document. A TPA performs annual ERISA compliance testing and prepares the annual tax filings (Form 5500). They generally serve as the point of contact throughout the life of the plan for any technical issues. For example, when the general makeup of the business and its plan participants change, the TPA can help make the appropriate changes to your plan to ensure its compliance.

Examples: Big companies like Fidelity provide TPA services, but there are also regional companies like Angell Pension Services.

Price: In the smaller context, there is usually a one-time charge to construct the plan, starting around $900, and then annual recurring fees for testing and tax filings which can start around $2,000/year.

Recordkeeper & Custodian

It’s common that the recordkeeper and the custodian are the same party.

The Recordkeeper tracks the daily activities of the plan. Once the plan gets going, this is the party that will be most visible to the plan participants on an ongoing basis. They provide the platform for everyone to view their accounts, make changes to investments and request distributions.

The Recordkeeper also provides the capabilities for the Plan Sponsor to manage the plan and add new participants. Behind the scenes, the Recordkeeper keeps track of the plans' assets and participants' contributions.

The Recordkeeper produces various reports to ensure the plan is in compliance.

The Custodian’s role is to hold the plan assets securely in accordance with the plan and the actions of the participants.

Examples: American Funds/Capital Group, TRowe Price, Vanguard, Fidelity, Charles Schwab

Price: Generally a percentage of assets under management. The plan sponsor should know that these fees can be paid in 2 ways:

Sponsor is billed directly; or
Fees can be deducted from plan participant accounts on a pro-rata basis.

Investment Advisor

The Investment Advisor's role is to review and guide investment decisions related to the plan. During the establishment of the plan, they might provide educational presentations for plan participants or even offer one-on-one sessions. On an ongoing basis, their role is to serve as an advisor and resource to the underlying investments of the plan. During the establishment of the plan, the Investment Advisor will work closely with the recordkeeper to ensure a smooth enrollment.

Examples: Large companies like JPMorgan or individual financial planning firms across the country.

Price: Percentage of assets under management.

Bundled Option?

There are options in the market for a bundled service arrangement where a single provider will handle all or a combination of those services. This is often sold as a turn-key solution by a larger company. This can make sense for certain companies who are fairly straightforward. These solutions offer a level of efficiency and can lessen administrative burden, but might also compromise flexibility and customer care.

Examples: Payroll Companies like ADP or larger companies like Fidelity.

Price: Heavily dependent on the company and size of the plan, but usually a combination of a subscription-based price plus a percentage of assets under management.

Tax Credits

Eligible employers may be able to claim a tax credit of up to $5,000 for 3 years for the ordinary and necessary costs of starting a 401(k). This is a dollar-for-dollar offset to income.

Eligibility Requirements:

Fewer than 100 employees who received at least $5,000 in compensation the preceding year;
At least 1 non-highly compensated employee; and
You didn’t have an old plan with substantially the same people in the prior 3 years.

Eligible Start-up Costs:

Setup of Plan
Administration of Plan
Education of EE’s of Plan