Charles Marsala Explains the Basics of 401K Plans

Charles Marsala November 23, 2014 0
Charles Marsala Explains the Basics of 401K Plans

401(k) plans can be a powerful tool in promoting financial security in retirement. They are a valuable option for businesses considering a retirement plan, providing benefits to employees and their employers.
Employers start a 401(k) plan for many reasons:
• A well-designed 401(k) plan can help attract and keep talented employees.
• It allows participants to decide how much to contribute to their accounts.
• Employers are entitled to a tax deduction for contributions to employees’ accounts.
• A 401(k) plan benefits a mix of rank-and-file employees and owners/managers.
• The money contributed may grow through investments in stocks, bonds, mutual funds, money market funds, savings accounts, and other investment vehicles.
• Contributions and earnings generally are not taxed by the Federal Government or by most State governments until they are distributed.
• A 401(k) plan may allow participants to take their benefits with them when they leave the company, easing administrative responsibilities.

Remember, investing involves risk and investors can lose their principal.
Establishing A 401(k) Plan
When you establish a 401(k) plan, you must take certain basic actions. One of your first decisions will be whether to set up the plan yourself or to consult a professional or financial institution – such as a bank, mutual fund provider, or insurance company – to help with establishing and maintaining the plan. In addition, there are four initial steps for setting up a 401(k) plan:
• Adopt a written plan document,
• Arrange a trust for the plan’s assets,
• Develop a recordkeeping system, and
• Provide plan information to employees eligible to participate.
Even with the best intentions, mistakes in plan operation can still happen. The U.S. Department of Labor and IRS have correction programs to help 401(k) plan sponsors correct plan errors, protect participants’ interests, and keep the plan’s tax benefits. These programs are structured to encourage early correction of the errors. Having an ongoing review program makes it easier to spot and correct mistakes in plan operations.
A 401(k) Plan Checklist
• Have you determined which type of 401(k) plan best suits your business?
• Have you decided to hire a financial institution or retirement plan professional to help with setting up and running the plan?
• Have you decided whether to make contributions to the plan, and, if so, whether to make non-elective and/or matching contributions? (Remember, you may design your plan so that you may change your non-elective contributions if necessary due to business conditions.)
• Have you adopted a written plan that includes the features you want to offer, such as whether participants will direct the investment of their accounts?
• Have you notified eligible employees and provided them with information to help in their decision making?
• Have you arranged a trust for the plan assets or will you set up the plan solely with insurance contracts?
• Have you developed a recordkeeping system?
• Are you familiar with the fiduciary responsibilities?
• Are you prepared to monitor the plan’s service providers?
• Are you familiar with the reporting and disclosure requirements of a 401(k) plan?
For help in establishing and operating a 401(k) plan, you may want to talk to a retirement plan professional or a representative of a financial institution offering retirement plans.
About the Author: Charles Marsala is a Financial Advisor with Benchmark Investment Group with Securities offered through LPL Financial, a member FINRA/SIPC. He can be contacted at

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