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In the first part of our series, we discussed the basic elements of creating a winning 401(k) strategy that will meet the needs of your business. (See “Time to consider a 401(k) Plan,” enterprise, August 1999.) Once the basic strategy has been drafted, there are some finer points that business owners should consider on the way to implementing their plans.
n Your employee benefits committee should confirm that there is a strong enough interest among employees to start a 401(k) plan and that it is in the best interest of the business to do so. Distribute information about the benefits of a 401(k) and then poll your employees to establish their level of interest.
n A typical 401(k) plan establishes a retirement account for participating employees that defers the income tax on all contributions. Generally speaking, employees can authorize payroll deductions of up to 20% be placed in the account and employers can contribute up to an additional 15% of an employee’s earnings if they choose-all nontaxable to the employee. For example, if an employee makes $50,000 and designates that $5,000 go into the 401(k), the employee would be taxed for the year at $45,000. Employees then have the responsibility of managing their account by investing their funds in a menu of investment vehicles that offer levels of risk from conservative to aggressive.
n When you begin the process of interviewing the company that will be the plan’s service provider, you will find that each has strengths and weaknesses. The plan administrator is the company that will set up, monitor and supervise your plan. If you have a good working relationship with a bank or insurance company, there may be advantages to choosing it to administer your 401(k) plan.
For example, Kim L. Hunter, president and CEO of Los Angeles-based Lagrant Communications, a nine-year-old $3 million advertising and public relations firm, established a 401(k) plan about two years ago. Hunter points out that since ADP was already administering the payroll for his firm, it offered him savings that made the cost of adding the 401(k) plan competitive with other firms’ prices. ADP’s familiarity with his firm, and its efficiency, were also pluses.
Business owners will have to determine whether to give a “matching contribution” to those who contribute to the plan. “If a company decides to match employees’ contributions, it’s like icing on the cake,” says Los Angeles-based Merrill Lynch vice president and financial consultant Lemuel Daniels. “It’s like getting a raise just for saving.” The percentage of employee contributions you choose to match shouldn’t exceed the amount of profits you can realistically afford to share with employees. Your chief financial officer, the accounting department or the investment committee should help you with this decision.
Where matching contributions are given, an employee is typically required to remain at a company for a period of time before he or she is eligible to receive the full amount. This process is called “vesting.” Companies choose their vesting schedules. Most require between zero to seven years (although the