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Setting Up A 401(k) Plan: The Cliff Notes

Making hasty choices when setting up a 401(k) can cost your business, or your employees, tens of thousands of dollars in unnecessary plan expenses. For this reason, it’s important you hire a 401(k) service provider that’s not only reputable, but also consultative. If a provider tells you they can setup your plan in minutes – run. Setting up a 401(k) plan that matches your company goals simply can’t be done using pre-filled, signature-ready forms.

Like most complex purchases, a new 401k plan can’t happen overnight. Most 401(k) setups take approximately 30-60 days due to the numerous steps that must occur. The good news is your 401(k) provider will do most of the heavy lifting throughout this process – generally, they’ll just need guidance from you from time to time. The more responsive you are, the quicker the process will go.

One of the key reasons plan sponsors get overwhelmed during the 401(k) setup process, or stop it altogether, is bad expectations for the process. Having a general sense of what is required can make all the difference in the world and keep all parties on track for a painless 401(k) setup. Below is a high-level summary of what every plan sponsor should know going into plan establishment, the “Cliff Notes” if you will.

Plan Design

Plan design is where you choose features like eligibility, vesting, and employer contributions for your 401k plan. If I can offer anything on the topic of Plan Design, it would be not to get ahead of yourself - your choices can result in dramatically different expenses, so you should know your options. Fortunately, a good Third Party Administrator (TPA) can help you understand your options and make the best choices for your business. Want a head start? Check out our Plan Design Checklist for a breakdown of your options.


You must make several investment-related decisions as a 401(k) plan sponsor. Dramatically different fees and expenses can result from this decision-making, so you should understand your investment options.

Fortunately, 401(k) investment decision-making does not need to be difficult or time-consuming. All 401k plans require just two basic investment decisions to be made:

  • Pick a fund lineup and
  • Choose the nature of participant investment advice to offer

You can make these decisions yourself or hire a professional financial advisor to make them for you. If you want a financial advisor for your 401(k) plan, we have an Advisor Directory available on our website full of them.

Fidelity Bond

Not only should you be bonded, but so should your service providers. A Fidelity Bond is simply insurance that protects employee benefit plans from risk of loss due to fraud or dishonesty by people who “handle” the plan funds. Click here to read more.


You are responsible for providing your participants with the necessary materials to learn about the plan and how to enroll in the plan when they become eligible. You will need to track service for your employees and notify them when they become plan-eligible.

Enrollment Process

You or someone in your office can handle this process once supplied with the necessary enrollment materials by your service provider. These materials typically include the Summary Plan Description (SPD), the Participant Fee Disclosure , Enrollment or Wage Deferral Form, and the Beneficiary Designation Form. Other documentation may be provided depending on your plan design and service provider.

Contribution Processing

It is important to understand how employee contributions will make it into your 401(k) plan. We call this process contribution processing. It is the plan sponsor’s responsibility to submit contribution amounts to their service provider each payroll period. Make sure you understand this process so payrolls can be processed timely. The Department of Labor can impose penalties if you fail to remit employee contributions for your plan timely.

Annual Reports, Disclosures, Notices, Etc. - Do not be intimidated!

Depending on your plan design, you may be required to distribute notices and reports to your employees from time to time. Some of these reports, disclosures and notices may not apply to you. It’s also important to keep in mind that your TPA should not only prepare these items, but also provide you with detailed instructions about the process and any deadlines associated with them. There is a great guide available on the DOL website with an explanation of each with timing requirements.

Annual Testing

There are certain non-discrimination rules most plans will require. Average Deferral Percentage/Average Contribution Percentage (ADP/ACP) Testing and Top Heavy Testing are the two most common types of non-discrimination testing. Other testing requirements may apply depending on your plan document design.

Annual Form 5500

The Form 5500 was created to satisfy the annual reporting requirements under ERISA. You can read more about Form 5500 here. What you need to know is that your TPA is responsible for preparing this form, but up to you to review and electronically file it by its deadline – generally July 31 of each year, or October 15 if you’ve filed for an extension. Make sure you ask your TPA about this process.

Getting Started

Now that you have an understanding of what will be expected of you, it doesn’t seem so intimidating. With the right service provider supporting you and administering your plan, you will be on your way to a breezy plan set-up and can begin that essential retirement savings!

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