Employees value financial planning and security, and offering a 401(k) is a great way to support their long-term financial security. Additionally, it provides companies with valuable tax advantages, making it a smart investment for both employees and employers.
How do companies choose the right plan and, how do they set up the 401(k) for employees?
What is a 401(k) plan?
A 401(k) is an employer-sponsored retirement savings plan that allows employees to contribute a portion of their paycheck, pre-tax or post-tax (Roth), into an investment account. Pre-tax contributions lower taxable income for the year, providing immediate tax savings, while Roth contributions are taxed upfront but allow for tax-free withdrawals in retirement.
Tax flexibility is just one of the many benefits of a 401(k) plan. The biggest benefit is the potential for long-term growth. Employee contributions grow over time, creating a reliable financial safety net for their retirement years. The money employees put in has the potential to grow substantially over time, especially when invested in mutual funds or other diversified portfolios.
Employers can further enhance the value of a 401(k) by matching a percentage of employee contributions. Some employers also offer profit-sharing contributions, allocating a portion of the company’s annual profits into employees’ 401(k) accounts. This option is a great way to reward employees for a profitable year, and it offers employers the flexibility of adjusting their contributions based on the company’s financial performance.
6 steps to set up a 401(k) plan
Here’s how to start a 401(k) plan in six steps:
1. Decide which type of 401(k) plan to use
First, decide which type of plan is best for the compant. Here’s a breakdown:
Traditional 401(k). Employees contribute pre-tax dollars from their paycheck, reducing their current taxable income. Taxes are paid upon withdrawal in retirement. Employers can offer matching contributions and profit-sharing options.
Roth 401(k). Employees contribute post-tax dollars, meaning withdrawals in retirement are tax-free. Employers can still offer matching contributions, but those contributions will be deposited into a pre-tax account, separate from Roth funds.
Safe Harbor 401(k). Designed to simplify compliance with IRS nondiscrimination testing, a Safe Harbor plan requires employers to make mandatory contributions to all eligible employees regardless of their salaries.
Solo 401(k). Solo plans allow higher contribution limits compared to traditional options. These are designed for self-employed individuals or small business owners with no employees other than a spouse.
To select the most suitable option, evaluate workforce demographics, budget, and long-term goals. Consult a financial advisor or plan provider for help weighing the different 401(k) plan options.
2. Select a plan provider
Partner with a trusted financial institution, such as a bank, registered investment advisor, or a brokerage, to manage the 401(k).
They oversee contributions, investments, and distributions while adhering to fiduciary standards to protect employee savings. Look for a provider that offers competitive fees, user-friendly tools, and strong customer support.
3. Draft a 401(k) plan document
If a company offers a 401(k), it’s legally required to outline how it will operate in a formal plan document. The plan document includes:
4. Set up plan administration and recordkeeping
Running a successful 401(k) plan requires systems for enrollment, contributions, and accurate recordkeeping. Here are some of the tasks systems should take care of:
Tracking employee contributions and employer matches
Monitoring investment performance
Managing account statements and reports
Ensuring compliance with IRS and Department of Labor (DOL) requirements
Companies don’t have to build these systems from scratch. Many plan providers offer integrated platforms that streamline the recordkeeping process to help employers stay compliant.
5. Communicate plan details to employees
All employees should be informed about the benefits of the 401(k) plan, and provided with clear instructions for getting started. Communicate details like how it works, how to access their 401(k) account information, contribution options, and employer matching.
This is a lot to cover in an email. Consider offering workshops or webinars to encourage participation and educate people about the plan’s benefits.
6. Maintain compliance
The IRS and DOL heavily regulate 401(k) plans. To avoid penalties, work with a plan provider or consultant to monitor compliance. Here’s a quick look at some of the key requirements:
Annual nondiscrimination testing. This ensures the plan benefits all employees, not just those with high salaries.
Contribution limits. The IRS sets annual limits on employee contributions. For 2025,
the limit is $23,500, with additional catch-up contributions available for employees who are nearing retirement age.
Timely contributions. Employers are required to deposit employee contributions promptly.
The benefits of offering a 401(k) to employees
For most employees focused on saving for retirement, a 401(k) plan is an obvious choice. However, 401(k) plans offer significant benefits for employers, too. Here’s how:
Enhance financial wellness. A 401(k) helps employees build long-term financial security, reducing stress and enhancing workplace productivity. When paired with a financial wellness benefit like
EarnIn, companies can go a step further – giving employees tools to access, manage, and plan their money. Together, these benefits help support both immediate financial needs and long-term financial well-being.
Tax savings. Companies can deduct the contributions they make to employee 401(k) accounts, reducing the organization’s overall tax liability.
Increase productivity. Employees who feel financially secure are more focused, engaged, and satisfied in their roles. This makes them more productive — and makes businesses more profitable.
Why 401(k)s pair nicely with EWA
Dipping into retirement funds is costly. Employees don’t just pay taxes and penalties on early withdrawals — they also sacrifice long-term growth. A withdrawal today can mean tens of thousands of dollars lost in compound interest over the years.
For employees struggling with short-term financial pressures, relying on a 401(k) for emergencies isn’t sustainable. That’s why many companies are exploring ways to supplement retirement plans with tools that offer immediate financial support. Partnering with EarnIn can
give employees access to a portion of their earned wages before payday, helping them manage short-term expenses today without derailing their long-term financial goals.
How to support employees beyond a 401(k)
To build a more comprehensive benefits package, look for additional tools that help employees address both their immediate financial needs and their long-term retirement goals. These might include:
Financial education programs. The right program will educate employees on how to budget, save, and invest their money.
Health Savings Accounts (HSAs). For employees with high-deductible health plans (HDHPs), HSAs offer a tax-advantaged way to save and pay for medical expenses.
Frequently asked questions
What does “vested” mean in a 401(k) plan?
Vested funds refer to the portion of an employee’s 401(k) funds that they fully own, including employer contributions, after meeting certain service requirements. Vesting periods are a great way to incentivize workers to stay with the company.
Are there alternative retirement plans to 401(k) for small businesses?
For small businesses or self-employed individuals, a
Simplified Employee Pension (SEP) IRA is a great alternative to a 401(k). SEP IRAs are easier to set up and manage and have lower administrative costs. Employers contribute to employees' SEP IRAs, and the contributions are tax-deductible. This plan works particularly well for small teams or solo business owners looking for a flexible retirement savings option.
Can employees invest their 401(k) funds in mutual funds?
Yes. Most 401(k) plans allow employees to invest their contributions in a selection of mutual funds, which are professionally managed investment portfolios made up of stocks, bonds, or other assets. Employees can typically choose from a number of options to grow retirement savings over time while spreading out risk.
Support teams today for a stronger tomorrow
Offering a 401(k) plan is a big step toward supporting employees’ financial futures. Take it a step further by combining the 401(k) with EarnIn to provide immediate
financial wellness support that helps workforces navigate the challenges of today while preparing for tomorrow.
From day-to-day expenses like gas and groceries to unexpected costs, giving employees access to
on-demand pay when they need it most provides critical financial support. This not only helps reduce financial stress, but also strengthens recruitment, increases productivity, and supports retention.
With EarnIn, employees can access up to $150 per day, with a maximum of $750 per pay period, and receive their pay in minutes for just $2.99 per transfer—or choose free delivery via ACH. The solution is simple to roll out, with no cost to employers and no integration required with payroll, time and attendance, or HRIS systems. We provide all the tools and support needed for a seamless launch, and our platform scales effortlessly to meet the needs of businesses of any size.
Request a demo today to see how EarnIn can help companies offer extra benefits without the extra work.
Please note, the material collected in this post is for informational purposes only and is not intended to be relied upon as or construed as advice regarding any specific circumstances. Nor is it an endorsement of any organization or services.
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