401k Offers Small Businesses an Edge over Bigger Concerns

Will offering a 401k plan for employees help me attract good talent when there are many bigger companies in my locality carrying out the same business as me? Wouldn’t potential employees simply save in other ways and choose a bigger employer instead of me?- Gerardo H. Fields, Honolulu, HI 96813, recently opened a graphics business from home.

Big companies are usually at an advantage when it comes to hiring skilled talent. They maybe able to offer a bigger paycheck, better perks, even a better brand name. But this does not mean that small businesses are stuck with hiring only those who have not been successful with bigger employers. In fact, today, with special 401k plans designed for small businesses, employers like you are in a good position to compete with larger companies when it comes to hiring the best talent in the market.

Now, it is possible for a business of any size to have a 401k plan that is quite affordable. By choosing DIY suites like the one offered by http://401keasy.com/, you can have a comprehensive plan that gives your employee a good range of investment options. The best part is that these suites make it easy for you as well as your employee to track and manage the funds in the account with ease.

If your business employs less than 100 people, then you may be eligible for the $500 tax credit for first three years since the establishment of the plan. This is an advantage that neither big businesses nor owner only businesses enjoy. For your employee, the fact that contributions go from his pre- tax dollars cuts down his yearly tax bill quite significantly, letting him save more and give less to uncle Sam.

During the recession, many big companies were forced to cancel the employer matching contributions as part of cost cutting measures, thus demotivating employees quite dramatically. In a small business like yours with limited employees it is a relatively easier task to sustain employee match contributions because the total outlay is not as massive as with bigger concerns that have many more 401k participants on the rolls. By maintaining contributions and making it easy for your employees to save for their retirement with a DIY suite, you can present yourself as an empathetic employer who is actually helping them save for their future financial security.

Why Establish 401k Plans

I am setting up my own small home furnishing business for which I aim to hire about 10 employees. My business consultant tells me that establishing a 401k plan for my employees is a good idea. Why should I set up a 401k plan and how do I benefit from it-? Arnold P. Vaughn,
Sacramento, CA 95814

Arnold, your business consultant is perfectly right. Setting up a 401k plan for your home furnishing business is definitely a great idea especially in this post recession economic climate where people are quite keen on saving for the future. A 401k plan for your employees gives them the opportunity to save in a very effective way for their retirement years. Plus, there are some distinct advantages of saving with these plans. Two of the key aspects that make 401ks so attractive to employees are: tax benefits and employer contributions.

The contributions to the employee’s 401k are taken from his pre- tax dollars. This means that he ends up with lesser taxable earnings every year. The funds he has saved through his 401k plan are taxed only when he withdraws them, at which point he may fall in a lower tax bracket.

The fact that many employers make matching contributions to the employee’s 401k plan make these plans very attractive indeed. For the employee, the employer’s contribution is free money that lets him attain his retirement savings goal much faster.

For you, the employer, setting up a 401k plan is a great way to attract the most talented professionals in the market to your company, ensure their loyalty to the company and keep them motivated to put in their best for you. In addition, you get some tax benefits for the 401k contributions you make on behalf of employees. Given that setting up a 401k plan has become a simple and speedy process, thanks to DIY suites like http://401keasy.com, there is no reason for you to not have one for your small business employees.

401k Plans for a One Person Company

I run a graphics design business where I am the only employee as of now. Can I set up a 401k plan for my business that I can contribute to? Will I get the tax advantages that regular employees do with their employer sponsored 401k plans? Chan Chung, Bronx, NY 10467

Yes, you can set up a 401k plan for your one person business just like any other business owner can for the benefit of his employees. There is a specific version of the 401k plan that is designed to help small business owners like you save for their retired life. Until the year 2002, it was not possible for a one person business to have a 401k plan for its own but this is not so anymore.

You will find this plan under different names, for example, the http://smallbusiness401k.com calls it the Small Business 401k for One. Under this plan, you can open a 401k account for your owner only business. Businesses that only have employees who do not qualify for the plan or businesses in which the only employee other than the owner is his/ her spouse can also choose this plan.

These plans offer all the benefits that you would stand to get from a regular employer sponsored plan including the possibility of loans from the account. You can choose from a wide range of investment products for this account so that you can diversify your plan assets adequately. In addition, if at some time in the future you decide to expand, you can easily convert the plan into a multi participant plan as well. The contributions you make into your one person plan are made from pre- tax dollars so you get significant tax advantages from setting up this plan.

401k Plan Fees

I recently read about the U.S Department of Labor’s audit of 401k plans. Why are such audits conducted and do they make any difference to my small business’s 401k plan-? Susan J. Lin, Windom, MN 56101, runs a dress designing outfit from home.

The U.S Labor department audits 401k plans to make sure that they are being operated in such a way that the participants are really benefitted. These audits do help 401k participants or employers like you who offer these plans in their small business for their employees. That’s because audits make sure the 401k plans offered by various providers are in line with certain standards that are designed with the participant’s needs in mind.

One very significant way in which an audit can help you is that it eliminates the incorporation of hidden fees into the plans. Many providers include such costs in the plan but do not disclose these in clear terms when the plan is established. As a result the participants may end up paying several hundreds of dollars through the plan’s life without even knowing it. The participant’s saving potential is reduced to this extent. An audit of the 401k plan reveals these costs and helps make employees and employers like you aware of the potential hidden fees that you may be paying for the plan.

If you would like to have more control over your 401k plan and keep the costs to the minimum possible you could opt for a 401K DIY suite like the one offered by http://smallbusiness401k.com/. Such suites let you establish the plan by yourself, manage it with ease and carry out monthly updations without depending on external help. Getting familiar with such plans is not a challenging task at all because these are designed to be user friendly. Once you have familiarized yourself with the way the software works, it should take you just a few minutes each month to have your records up to date.

Borrowing Against Your 401k Plan

I own and operate a small business that sells solar powered systems for residential applications. I have heard that the IRS allows you to borrow against your 401k plan, but not sure how it works. Can you throw some light on this matter? Darryl Allinder, Albuquerque

Yes, one of the advantages of a 401k plan is that the IRS permits you to borrow against it, but keep in mind that the loan option is not offered with all plans. Also, the maximum amount that you can borrow with your 401k plan is 50% of the 401K account balance or the lesser of $50,000. This is required to be paid over a term of five years. The rate of interest is determined by your 401k plan and is typically just a couple of points over the prime rate.

Borrowing against your 401k is a relatively easy process. Verify if the rules of your 401k plan permit loans or get in touch with the administrator of your plan for more details regarding the same. Your plan may disallow you from borrowing or limit the loan use for certain purposes like medical expenses only. If you have a 401k management package from http://smallbusiness401k.com/, you can exclude or include 410k loans, based on your requirements and preference.

To initiate the 401k loan process you will have to fill in a request form, and provide information such as you name, account specifics, Social Security Number, and other details pertaining to the loan. There is no credit check for a 401k loan approval. Also, there aren’t any tax implications when you borrow against your 401k. Once the loan is sanctioned, you have to repay it along with the interest over the 5-year term with loan payments on at least a quarterly basis. This money will be deposited back into your 401K account.

Expenses Associated with Setting Up a 401k

As the owner of a women’s boutique, I feel its high time that I set up a 401k for my  employees. But before I proceed, I would like to know what are the expenses involved in administrating a 401k? Marcie Maughan, Tennessee

What you are doing is absolutely right- it is smart to understand the kind of expenses that go into setting up a 401k for small business owners. You must ensure that the fees you pay to your 401k service provider are reasonable in lieu of the quality and level of the services provided. As a thumb rule, 401k expenses can be widely categorized into administration fees, investment fees and individual fees linked to an optional feature of your 401k plan.

The administration fee is charged for all the daily administrative work associated with managing your 401k, such as accounting, record keeping, trustee services, legalities, and other aspects that go into administering your plan. Additional services such as investment advice, online transactions, or any sort of electronic access may also add to your overall fees. In some cases, these fees will be deducted from the return on investment, and in others they will be charged separately. For a one-time set up fee with no hidden charges, you can consider an online 401k set-up like http://small401k.com for your small business.

Investment management is one area that accounts for most of the expenses related to your 401k. A certain percentage of the invested assets may be charged for services that are investment-related. This is directly debited from the return on investment, and your net return is what you get after a deduction of the investment fees. Understand the expenses related to your 401k investment management to make an informed decision. Individual fees are charged for the optional features you choose when designing your 401k plan; this includes taking out a loan against your 401k or a participant investment choice. 

401k Fees and Charges to Beware of

My interior decoration business has 5 employees, some of them working from home. I want a 401k software package that can help me set up a 401k plan for my business from which I can take a loan when I want to expand. Do all 401k plans charge the same fees for loans? If not, what should I consider reasonable? Alison Lumpkin, Witts Springs, AR 

Unfortunately, a number of small business owners fail to ask this very important question before they sign up for a 401k plan. Before you start shopping for your plan, you should know that there are some plans that come with fees and charges that are not really reasonable at all when you want to take a loan.

A good thumb rule is to avoid a plan that charges a percentage of your loan on an annual basis. When you decide to dip into your 401k account, chances are you already have a large enough financial need. If it is business expansion for which you will need your 401k funds, chances are the bill is likely to be quite high. You definitely do not want to be paying huge fees under either of these circumstances. A 401k plan like http://smallbusiness401k.com/ that has the same fixed dollar charge for a loan of any size is a better choice. Simply make an estimate of how much you will need as your loan and compare the percentage charges with the fixed charges. You will see which one makes more sense straight away.

Lock-ups are another aspect you should beware of when you are opening your 401k account. Some plans, especially those offered by insurance companies, often have lock-up periods preventing you from taking your funds out until a specific time has passed. Until then, you are stuck with a plan that does not let you take affordable loans. If you do take the loan in spite of the high charges you are committing yourself to paying the annual fee until the lock-up period expires.