Small Business 401k Plan

Providing benefits like a 401k retirement plan enables small businesses to compete for and retain high quality employees who might otherwise be tempted to seek careers in larger industries. Small business 401k plans were designed by the federal government to provide greater financial security for entrepreneurs and employees at retirement. Enterprises owned by self-employed minorities, veterans, and women usually lack sufficient capital, credit, or financial backing to provide employee pensions and benefits. But a tax-advantaged retirement fund allows individual entrepreneurs and workers to pool resources to provide monies in the form of tax-free contributions. Any employee over the age of 21 is qualified to enroll. The federal government prohibits discriminating against employees who are close to pension age, but participants who enroll as young adults make the smartest move to secure a stable income for the future. Contributions have decades to accumulate and benefits from prudent investments have ample opportunity to accrue.

A 401k retirement plan is basically a corporate savings account into which workers and business owners make regular deposits, or contributions, which are not pre-taxed. Contributions are held in trust and managed by a trustee who ensures that assets are protected until distributions can be made to participants or beneficiaries -- either at retirement, termination, or death. Monies deposited into a defined contribution fund can be invested in stocks, mutual funds, or other profit-making ventures to provide an opportunity for participants to realize added benefits, or returns, on annual contributions. Individuals, who could never amass sufficient cash alone, reap the rewards of collectively contributing funds into retirement. The small business 401k plan is actually a Biblical principle in action. In Acts 2:44-45, early New Testament church members pooled individual resources for the common good: "And all that believed were together, and had all things common; And sold their possessions and goods, and parted them to all men, as every man had need."

Before deciding to operate a 401k retirement plan, entrepreneurs should consult a professional financial planner, banker, or insurance company to determine what type of plan best suits employer needs. Businesses of any size may qualify to operate a traditional plan, which can be included with other employee incentives to offer a more attractive benefits package. A well-thought-out, written document should outline how contributions will be made, specify the kind of plan to implement, and detail the procedure for keeping employees informed. A traditional 401k gives business owners the right to choose from three methods of making contributions. A SIMPLE 401k is best suited for employers with less than 100 employees who earn a minimum of $5,000 in the preceding year. However, the drawback to operating a SIMPLE plan is that it prohibits employees from receiving any contributions or assets from other employer-provided pensions. The third type, called a safe harbor, operates like a traditional 401k, but employer contributions must be fully vested when made. In other words, employees are entitled to all contributions made upon termination and contributions cannot be forfeited.

Depending upon the kind of plan a business owner chooses to operate, employers may make contributions that match each dollar paid in by employees; or they may choose to make contributions totaling as much as 3% of each employees wages. A third option for entrepreneurs is to make contributions which are a combination of employer-matched funds and employee wage percentages. Employee contributions are usually payroll deductible and are not taxed until distributions are made. A small business 401k plan qualifies employers for tax deductions, but limits the amount of contributions employers and employees can make in any given year. Pre-tax contribution limits for 2008 are $15,500 for individuals under 50 years of age and $15,500, plus $5,000 catch-up, for those over 50. To get the most out of a 401k retirement plan, individuals should strive to contribute the maximum money allowed by law each year.

A tax-advantaged pension must be operated according to stringent Internal Revenue Services (IRS) regulations. Workers and business owners must be given an accurate accounting of assets held in trust as documented proof that participants investments and earnings are properly managed. Vital to the efficient operation of the small business 401k plan is the selection of a qualified trustee and/or administrator. Trustees, fiduciary administrators, or accounting personnel should all be bonded to avoid fraud or embezzlement. Integrity and accountability are paramount when handling monies participants faithfully save and depend on for a comfortable retirement. A trustee will handle making prudent investments of contributions and assets, preparing and filing annual reports with the federal government, and distributing benefits to participants. Human Resource directors are usually charged with the responsibility of disclosing a summary plan description (SPD) to new employees, which outlines requirements of enrollment and the benefits of participation.

Operating a 401k requires considerable fiduciary housekeeping, and it can easily become a full time occupation. Small business owners may want to consider hiring an onsite professional financial manager or accountant to oversee the day-to-day administrative duties of the 401k. The owners lending institution or banker may also be helpful in establishing, implementing and overseeing the 401k retirement plan. Most importantly, all contributing employees, regardless of age or amount of contribution, must be treated fairly. Federally-mandated non-discrimination testing policies must be implemented annually to ensure that employers and employees benefit proportionately to respective contributions. A tax-advantaged pension is not designed to benefit the wealthy business owner at the employers expense, or vice versa. If business owners and workers faithfully contribute to the small business 401k plan, everyone can enjoy a comfortable and lucrative retirement.

Compare 401k Mutual Funds

Employees are given opportunities to compare 401k mutual funds when participating in an employer sponsored retirement plan. Usually there are several options to choose from and investments are normally divided by percentage to equal 100% after choices are made. Some of the investment choices include stable shares, company stock, stock mutual shares, bond mutual shares, balanced shares, and money market mutual funds. The best performing mutual funds are stock shares. However, they are usually at a higher-risk for loss than other choices. Growth mutual funds usually have the higher potential for profit because the investment is in companies that are expected to have increased growth potential. The less risky shares are in stable, balanced, and money market shares. A retirement plan will provide some security for the future but trusting in the Lord is always profitable. Christians should trust in the Lord first and foremost but at the same time, should not be neglectful to use wisdom when it comes to monetary investments. "Some trust in chariots, and some in horses: but we will remember the name of the LORD our God" (Psalm 20:7).

Retirement plan investing should be as diversified as possible. That way, if one type of investment suffers a loss hopefully another one will have a gain so that over the long haul a significant gain will be realized. Investors take a risk with most investments chosen through a 401k. This is why some people go with the lowest risk stable funds after they compare 401k mutual funds. A stable fund will generally have slow growth with a fixed percentage of increase. A good rule of thumb is to put part of the money invested into a stable fixed fund and then break out the remaining amount over several other choices.

Stable shares provide stability when it comes to investments with a retirement plan. A stable fund may also be called capital preservation or capital accumulation. Sometimes stable accounts will outperform other investment opportunities. The best performing mutual funds are often the ones that provide consistent principal stability especially during a time when the stock market is in a down-market period. Stable shares are similar to money market shares but usually offer higher returns.

An employer that offers a retirement plan may have an option for investing in company stock. The best advice for employees when choosing options is to compare 401k mutual funds and put part of the investment in those and to not put everything into company stock. If for any reason a company suffers losses and stock investments shrink the investor will not lose everything if he or she invest diversely. Employees may be persuaded to invest heavily in company stock because they want to show their loyalty or because they believe the company is doing well and for the time being the company may be doing well but there are no guarantees that this good fortune will continue indefinitely. A wise investor never puts all of their money into one option but considers every option carefully.

Stock shares are probably the most risky of all investments but they can also be the most profitable. Some of the different kinds of stock shares are growth shares, value shares, blends, large-cap, mid-cap, and small-cap. In addition, there are index shares, international, and sector shares. When trying to pick the best performing mutual funds a person should do some research. Growth shares in stocks are usually fast growing but almost never provide dividends. Index shares are usually a group of stocks that represent a segment. Sector shares represent a specific sector such as health care, environmental, technological, and so on.

Money market accounts are insured by the Federal Government but money market mutual funds are not. Money market shares are investments in government and agency securities. In addition, money market shares are also investments in corporate securities. A smart investor will compare 401k mutual funds that include both short-term securities and long-term shares. A good retirement plan will include a variety of mutual funds that provide a balanced investment for the investor. Some plans offer a wise variety of choices and make it possible to make investment choices and changes over the Internet.

Another consideration when choosing the best performing mutual funds offered through a retirement plan are the fees that are associated with certain types of investments. An individual who is trying to decide how to break up his or her investments in a 401k plan should consider that different types of accounts carry higher fees than others. A plan administrator should be able to shed more light on the differences in these types of considerations. A plan participant should look for no load mutual funds because they have less fees than many others.

A person who has money invested in a retirement plan should be proactive with his or her investments. Individuals have the right to hire a representative or advisor to make sure that investments and fees charged are accurate and ethical. A plan participator should learn to scrutinize quarterly statements and to ask questions about any questionable items. Investors should make sure that someone is representing their interests when it comes to making the big decisions. Most plan participants will appreciate knowing that the retirement plan has many balances and checks to keep operations ethical. One way that an investor can guarantee that his or her interests are considered is by asking questions and bringing up concerns to those who make the important decisions.

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