There are four initial steps for setting up a 401(k) plan:
1. Adopt a written plan document,
- Plans begin with a written document that serves as the foundation and details how your plan will operate.
2. Arrange a trust for the plan’s assets,
A plan’s assets must be held in a trust to assure that assets are used solely to benefit the participants and their beneficiaries. The trust must have at least one trustee to handle contributions, plan investments, and distributions. Since the financial integrity of the plan depends on the trustee, selecting a trustee is one of the most important decisions you will make in establishing a 401k plan.
Generally, the business owner serves as the plan Trustee.
You may want to hire someone either to determine the investment options to make available under your plan or to manage the plan’s investments.
Continually monitoring the investment options ensures that your selections remain in the best interests of your plan and its participants.
3. Develop a recordkeeping system, and
- An accurate recordkeeping system will track and properly attribute contributions, earnings and losses, plan investments, expenses, and benefit distributions. In addition, a recordkeeping system will help when it comes time to prepare the plan’s annual return/report (Form 5500) that must be filed with the Federal Government each year.
4. Provide plan information to employees eligible to participate.
- You must notify employees who are eligible to participate in the plan about certain benefits, rights, and features. A Summary Plan Description (SPD) is the primary vehicle to inform participants and beneficiaries about the plan and how it operates.
