Setting Up 401(k) Flashcards
- Initial Consultation & Needs Assessment
Objective: Understand the client’s business, employee demographics, and retirement plan goals.
Action: The advisory firm meets with the business owner to assess the goals for the 401(k) plan, including how it will be used to attract and retain talent, contribute to employee retirement savings, and manage the company’s tax strategy. They also evaluate the company’s size, number of employees, and any unique circumstances (e.g., whether the business wants to offer a Safe Harbor 401(k), Roth 401(k), or profit-sharing features).
- Selecting a Plan Design
Objective: Design a 401(k) plan that meets the business owner’s objectives and complies with regulations.
Action: The advisory firm works with the TPA to design the plan structure. The advisor may present different options based on the business’s goals:
Traditional 401(k) plan or Safe Harbor 401(k) (to avoid non-discrimination testing).
Matching contributions or non-elective contributions (for Safe Harbor plans).
Roth 401(k) options or profit-sharing components.
They will also discuss eligibility criteria, vesting schedules, and the employee communication strategy.
- Choosing a TPA
Objective: Select a TPA with the expertise and tools to support the client’s plan administration.
Action: The advisory firm collaborates with the client to select a reputable TPA that fits the business’s needs. This involves assessing factors such as:
TPA’s experience with similar-sized businesses.
Administrative fees, reporting, and compliance services.
Technology and support for plan participants.
Responsiveness to plan management and legal requirements (ERISA compliance, IRS reporting).
- Plan Document Creation & Legal Compliance
Objective: Ensure the 401(k) plan complies with federal regulations (ERISA, IRS).
Action: The TPA drafts the official 401(k) plan document, which outlines the rules, employer contributions, employee eligibility, vesting schedule, and distribution options. The advisor ensures that the plan document aligns with the business’s goals and that all required IRS forms and filings (e.g., Form 5500) are included.
The advisory firm works with the TPA to make sure the document reflects decisions made during the plan design phase.
Preliminary review of compliance: Ensuring it meets all ERISA requirements, including the fiduciary duties.
- Employee Education & Enrollment Setup
Objective: Educate employees about the new 401(k) plan and get them enrolled.
Action: The advisory firm helps the business develop an employee education campaign. This includes:
Hosting informational sessions (either in-person or virtual) to explain the 401(k) features, investment options, and benefits.
Sending written materials about the plan (e.g., plan summary, investment choices, contribution limits).
The advisor helps employees understand their investment choices and how the plan works.
The TPA sets up an enrollment platform where employees can elect their contribution amounts, select investments, and designate beneficiaries.
- Implementation & Contribution Setup
Objective: Set up payroll contributions and ensure the correct administration of employee deferrals.
Action: The advisory firm works with the TPA and payroll provider to ensure that employee contributions are set up correctly. This involves:
Coordinating with the company’s payroll system to automatically deduct employee contributions from paychecks.
Ensuring employer contributions are calculated correctly, whether matching or non-elective.
The TPA ensures the timely and accurate processing of contributions, including compliance with the annual limits.
- Monitoring & Compliance Testing
Objective: Ensure ongoing compliance and handle non-discrimination testing.
Action: The advisory firm and TPA will work together to ensure that the plan is compliant with IRS and ERISA requirements, such as:
ADP/ACP Testing (if not a Safe Harbor plan) to ensure that the plan does not favor highly compensated employees.
Top-Heavy Testing to ensure that key employees do not disproportionately benefit.
Plan audits (if required) and other compliance checks.
The advisory firm will assist the client in making adjustments if needed to ensure the plan passes these tests.
- Ongoing Plan Administration & Support
Objective: Ensure the 401(k) plan continues to meet legal and regulatory requirements.
Action: The advisory firm provides ongoing oversight to ensure that the TPA is properly administering the plan and addressing any issues. This includes:
Reviewing plan performance reports.
Ensuring all required filings (e.g., Form 5500) are completed on time.
Making adjustments as necessary based on changes in IRS regulations, tax laws, or the client’s business.
Coordinating any mid-year plan changes (e.g., changes to the employer contribution structure).
- Annual Plan Review & Optimization
Objective: Evaluate the 401(k) plan’s effectiveness and optimize its design for future years.
Action: At the end of each plan year, the advisory firm and TPA conduct a review of the plan’s performance, employee participation, and compliance status. They may recommend adjustments, such as:
Adjusting employer contribution formulas or plan features (e.g., adding a Roth 401(k) option).
Analyzing investment options and ensuring they remain competitive.
Updating the plan to stay compliant with any new regulations or changes in employee demographics.
- Participant Engagement & Retirement Planning
Objective: Support employees in making the most of their 401(k) plan.
Action: The advisory firm may provide individual retirement planning services to help employees optimize their 401(k) savings, including:
Offering one-on-one consultations.
Providing retirement planning workshops.
Educating employees on the importance of regular contributions, diversification, and long-term saving strategies.
