401(k) Plan Basics for Employers

As of 2020, about 69% of private sector workers were offered a retirement plan by their employer¹. Among these, 401(k) plans are the most common, followed by defined benefit pension plans and other types of defined contribution plans such as 403(b) plans and thrift savings plans.

Why offer a retirement plan to employees?

Offering a 401(k) or other retirement plan to your employees can have a number of benefits for both your business and your employees.

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Many companies offer a 401(k) or other retirement plan as a way to attract and retain employees by giving them a cost-effective way to save for retirement. Some employers may also provide matching contributions to employee 401(k) accounts, which can help workers save even more for their retirement. More than ever, employees are carefully researching the retirement benefits offered by their employers in order to make the most of any retirement savings opportunities available to them.

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Employees in 2023 view access to a retirement plan as a vital employee benefit, and may only join and stay with a company that offers one. A retirement plan can also help you build a positive corporate culture and reputation, as it demonstrates that you are committed to supporting the long-term financial security of your employees.

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What are my responsibilities as an employer offering a 401(k) plan?

As an employer, you have a number of responsibilities when it comes to offering a 401(k) plan to your employees. Some of these responsibilities include:

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1. Choosing the plan: You will need to select a 401(k) plan provider and decide on the specific features and options for the plan, such as the types of investments available and any employer matching contributions.
2. Enrolling employees: You will need to provide information to your employees about the 401(k) plan and help them enroll. This may include distributing materials such as enrollment forms and informational packets.
3. Handling contributions: You will need to ensure that employee contributions are withheld from their paychecks and deposited into their 401(k) accounts as required by the plan. You may also need to make any employer matching contributions, if applicable.
4. Managing the plan or hiring a TPA to manage the plan: You will be responsible for managing the day-to-day administration of the plan, including handling any participant inquiries and ensuring compliance with relevant laws and regulations. This task is best left to a Third-Party Administrator (TPA) due to the complexity of retirement plan compliance. 
5. Providing information: You will need to provide certain information to your employees about their 401(k) accounts, such as account balances and investment performance. You may also need to provide annual reports to the IRS and to plan participants. Again, a TPA or financial advisor (FA) can help you with these duties and can save you valuable time.

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Again, a TPA or financial advisor (FA) can help you with these duties and can save you valuable time.

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What does the employer do with employee contributions to the 401(k)?

As an employer, when you collect 401(k) contributions from your employees, you will be responsible for forwarding those contributions to the 401(k) plan provider or administrator. The plan provider or administrator will then use the funds to purchase the investments chosen by the employees, such as mutual funds or individual stocks.

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If you’ve chosen to match your employees’ contributions you will be required to make matching contributions to the employee 401(k) accounts.You are responsible for forwarding the matching contributions to the plan provider or administrator to be invested alongside the employee contributions.

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Where are our contributions invested?

It depends. The specific mutual funds and stocks that are part of your 401(k) plan will depend on the specific plan you enrolled in and the investment options offered by the plan. 401(k) plans often offer a variety of investment options, such as mutual funds, individual stocks, and bond funds, among others.

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Mutual funds

These are investment vehicles that pool together money from many different investors and use that money to buy a diversified portfolio of stocks, bonds, or other securities. There are many different types of mutual funds, including index funds, which track the performance of a specific market index, and actively managed funds, which are managed by a professional fund manager who makes investment decisions on behalf of the fund.

Individual stocks

These are shares of ownership in a specific company. When you own a stock, you have the right to vote at shareholder meetings and to receive dividends (if the company pays those out). Stocks can be a more risky investment than some other types of assets, as their value can fluctuate significantly over time.

Bond funds

These are mutual funds that invest, specifically, in bonds. Bonds are debt securities issued by companies, municipalities, and other organizations. When you invest in a bond fund, you are essentially lending money to the issuer in exchange for interest payments and the return of your principal when the bond matures. Bond funds tend to be less risky than stocks, but they also tend to have lower potential returns.

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The contributions from your company and employees are invested based on the risk level you feel comfortable with. This is something you’ll decide with the plan provider.

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Offering a 401(k) is a win-win

Overall, offering a 401(k) or other retirement plan can be a win-win for both your business and your employees. It can help you attract and retain top talent, build a positive corporate culture, and support the long-term financial security of your workers.

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Reach out to our team and we’ll help you set up the right retirement plan for your employees!

This information is provided as general guidance and may be affected by changes in law or regulation. It is not intended as accounting or legal advice. If you have questions please reach out to our team.

¹U.S. Bureau of Labor Statistics for 2020