The way workers save for retirement changed with the introduction of 401(k) retirement plans, which shifted the focus from traditional pension fund retirement plans. The Internal Revenue Service puts limits on the amount an employee can deposit in the plan. While this amount is subject to change by law each year, in 2008, for example, the limit was $15,500. This figure does not include any amount the employer decides to match.

The decision to match 401(k) contributions isn’t a requirement, but it is a factor in attracting and retaining talented employees. If employees feel that a company values them and their financial security, they will be less likely to leave for another job. If offering a 401(k) plan is new to you, learn the basics and remember your company can employ 401(k) administrators in-house or hire a company to manage the plans. Whether you're a new or established company, there are some 401(k) plans basics to consider before you alter or begin a new plan, such as:

1. Be sure you understand the laws and structuring requirements of a 401(k) plan.

2. Decide whether your company will manage the 401(k) plan.

3. Educate your employees on the different 401(k) plans and the options available to them.

Action Steps
The best contacts and resources to help you get it done

Compile all the basic relevant information for your 401(k) retirement plan

Before opening a 401(k) plan for your employees, it's important to understand all of the tax implications and structuring requirements for both the company and the employee. The IRS has specific rules covering each aspect of a 401(k) plan. A company that doesn't know or follow these rules can suffer severe penalties and sanctions.

I recommend: Contact the Internal Revenue Service about their 401(k) plan information packet. Examine the 401(k) retirement plans for small businesses tutorial from the U.S. Department of Labor to understand the benefits and the process of setting up contribution plan.

Determine how to manage a basic 401(k) retirement plan

With 401(k) plan management, there are essentially two options. You can have a finance employee on your payroll to manage the account or hire an administrator from an outside firm. There are pros and cons with each option. For smaller companies outside management may be the most cost effective option.

I recommend: Speak to a representative from Administaff Retirement Services about managing your 401(k) retirement plan. Send the employees responsible for the 401(k) plan administration to HRcertification.com’s plan certification education classes.

Implement an employee 401(k) plan education program so they'll understand the basics

A 401(k) plan won't work the way it's supposed to without employee buy-in. If the employees don't understand or utilize the plan, it will ultimately not have the desired effect. The 401(k) plans' basics, when explained correctly, can reassure the employees of your company's commitment to their future.

I recommend: Schedule a meeting with each employee to discuss his or her 401(k) plan future. Before you schedule this meeting, be sure the meeting leader examines the employee plan education tutorial available at 401khelpcenter.com. Purchase a company subscription to PLANSPONSOR magazine and send one to everyone who manages the 401(k) plan.

Tips & Tactics

Helpful advice for making the most of this Guide

• •  Before you outsource any services to a 401(k) administrator, it's imperative that you contact Securities and Exchange Commission and the Better Business Bureau, to verify their credentials. Outsourcing to a less than reputable company can result in financial and work force losses, which can permanently damage your company.

One of the most powerful perks you can offer your employees is a pension plan, and one of the most popular types is the 401(k). Named after an IRS code section, the 401(k) allows your employees to fund their own retirement through pre-tax contributions. If you can afford it, you can provide matching contributions. Both you and your employees get a tax break for contributing. A good 401(k) plan can:

1. Help you attract top talent.
2. Allow employees a large measure of control over their retirement plans.
3. Give employees the option of participating or not.
4. Provide your employees a retirement plan at far less cost to you than a traditional pension.

Action Steps
The best contacts and resources to help you get it done

Decide what type of 401(k) you will use

The cheapest is a plan in which you don't match your employees' contributions. If you choose to contribute, you need to decide how much and in what fashion. You can contribute a set percentage along with your employees. You can make your contribution a bonus paid annually. You can use the contribution as part of a profit-sharing program. Whatever method you choose, participation by your employees needs to be voluntary.

I recommend: For an overview of plans, see the Business Owner's Toolkit discussion of 401(k) plans. Also review the 401(k) plan requirements. For a comparison of different types of small business retirement plans, check out Wells Fargo.

Get familiar with plan providers

Because 401(k) plans are complex, most companies hire a plan administrator to run their programs. Banks, brokerage houses and other financial services companies offer 401(k) plan services. But even the biggest banks typically use another outside vendor. You can buy directly from some of the same vendors. In addition, some offer more hands-on 401(k) software, usually at reduced costs.

I recommend: One of the major providers of plans for business is ADP Retirement Services, which has partnering agreements with some of the nation's largest financial services firms, including Bank of America, Merrill Lynch and AIG SunAmerica. PAI offers a range of plans for small business. One company that offers self-run plans is 401(k) Easy.

Compare plan options and providers

When shopping for a plan, compare both prices and services. If you have only a few employees, you probably don't need an expensive plan with lots of options. You want to make sure the plan is both affordable and adequate for your needs. If you decide to use a self-run software plan, you should take it for a test drive to be sure you're comfortable running it.

I recommend: Several companies list their services and fees online. BuyerZone provides links to a range of providers and plans. Both Wachovia and 401(k) Easy offer plan descriptions and prices on their Web sites. ShareBuilder offers online quotes for plans based on your number of employees and location.

Know what you're getting before you buy

There's lots of fine print in even the most basic 401(k) plan. Make sure you understand what you're getting and how much it will cost before you buy. Starting over can be a real headache.

I recommend: Use this 401(k) Buyers Guide from BuyerZone to help you evaluate plans and offerings.

Tips & Tactics

Helpful advice for making the most of this Guide

• •  Even do-it-yourself software plans should offer help lines and backup assistance in managing your plan.
• •  Watch out for hidden costs and fees, particularly investment transaction fees that can eat into your employees' savings.
• •  Ask other small business owners and your own accountants and lawyers for recommendations on 401(k) plans. Your best advice might come from someone you already know or work with.
• •  Don't forget about your own retirement. You can participate in your company 401(k). Even if you don't currently have employees, you can set up a 401(k) for yourself.

The 401k plan grew from a little known tax code loophole—which is where the 401k name came from—to the most common way workers invest for their retirement. This industry possesses trillions of dollars in allocated 401k retirement plan contributions. A company that understands the overall ramifications of the 401k plan and its industry, on its employees, will find itself ahead the retirement investment curve.

Not only has the 401(k) retirement plans industry grown, but it's also become more complicated. With the different 401k plans available to a company, it's important understand your options. This new complicated industry can create advantages with retirement plan flexibility. To navigate through the industry, there are few items to consider, such as:

1. Keep up with any new government regulations regarding the 401(k) retirement plan.

2. Contact the industry leaders in 401k plan administration.

3. Employ an independent auditor to review your company's 401k retirement plans.

Action Steps
The best contacts and resources to help you get it done

Monitor all regulatory changes for the 401(k) plans closely to ensure your overview is current

The 401(k) plans industry is like any other in that it never stands still and is always changing. This is especially true concerning regulation. The government controls the cap on maximum contributions and this cap can change from year-to-year. If you understand how any changes affect your company, then it's to your business and its employees' advantages.

I recommend: Register at the Plan Sponsor website, which will email you breaking regulatory news in the 401k industry. Use the daily digest tools and forums available at Research401k.com to stay current on industry news.

Evaluate the 401(k) administrators' options

The leading providers of 401k plan administration offer a barometer of the industry as a whole. The services and rates that each company offers will vary, but the basic plan structure is the same at most every company.

I recommend: Speak to a representative at Teachers Insurance and Annuity Association (TIAA CREF) about its retirement services. Compare these 401(k) administration rates and service to those at Fidelity Investments.

Review the different types of plans to get a clear 401(k) plans industry overview

The plans available within the industry include the Solo, Safe Harbor and Roth 401(k) plans. The Solo plan is for self-employed individuals. A safe Harbor plan is a 401k plan designed for small business operators. The Roth 401(k) plan is more advantageous to younger workers in your company.

I recommend: Examine the Safe Harbor plan comparison from the CPA Journal. View the Solo plan tutorial available from the American Institute of Certified Public Accountants. Utilize the Roth 401(k) plan news and information section at 401khelpcenter.com, to understand the impact of this type of plan.

Tips & Tactics

Helpful advice for making the most of this Guide

• •  Any 401(k) plans effectiveness begins with employee education. While you may think that the plan works fine, your employees may tell a different story. Without employee buy-in, there isn't any plan, no matter how effective, that will work.

Learning about 401(k) plans key terms is a good place to start if you're considering starting up a retirement fund for your employees. From automatic enrollment to matching, after-tax and pre-tax contributions, 401(k) plans have several terms you may want to know before beginning one of these programs. Learning 401(k) plans key terms will also benefit your employees, who will want to know about terms such as rollover and cash-outs.

Action Steps
The best contacts and resources to help you get it done

Matching contributions

One of the greatest assets of 401(k) plans are matching contributions. Many companies will match employee contributions to a 401(k) plan, either dollar-for-dollar or a certain percentage. Many companies will match up to 3 percent, with some going as high as a 6 percent match.

I recommend: Money-zine.com offers a brief description of a matching contribution, gives an example and also explains why employers participate in matching contributions.

Automatic enrollment

While some companies require employees to submit paperwork in order to participate in 401(k) plans, others use an automatic enrollment system. An employee is automatically enrolled in a 401(k) plan by the employer, and how contributions are invested is decided by the plan design.

I recommend: Chang, Ruthenberg & Long PC provides a detailed explanation of a few types of 401(k) automatic enrollment programs.

Roth 401(k)

In 2006, the Roth 401(k) was introduced as another retirement option for employers to offer their employees. While still a retirement plan with employer-matching contributions, Roth 401(k) plans differ from traditional 401(k) plans in several ways, including contributions made with after-tax dollars and no taxes on withdrawals dependent on certain provisions.

I recommend: SmartMoney gives an extensive overview of a Roth 401(k).

Vesting

In 401(k) plans, vesting refers to ownership of the plan's account balance. An employee is always fully, or 100 percent, vested as far as his or her own contributions are concerned, but how much he or she is vested in an employer's matching contribution differs from company to company. Many companies require that an employee work for a set number of years before being fully vested in the 401(k) plan.

I recommend: Find a detailed explanation of vesting at Research401k.com.

Rollover

A rollover allows an employee to move the balance of a 401(k) to another employer's plan or to his or her own retirement account should the employee transfer to another job. Tax benefits are retained during a rollover and no penalties apply.

I recommend: 401khelpcenter.com has a detailed explanation of what a rollover is and how to use it in regards to a 401(k) plan.

Cash-out

A cash-out occurs when an employee takes out money from his or her 401(k) account before reaching retirement age or when he or she moves from one job to another without rolling over the 401(k) to a new plan. Cash-outs are subject to early-withdrawal penalties and federal withholding taxes.

I recommend: 401k.org offers a brief definition of many 401(k) plans key terms, including cash-out.