Understanding your 401(k) Plan Document
Understanding your 401(k) Plan Document Betterment will draft your 401(k) plan document, but it’s important that you understand what it includes and that you follow it as written. What exactly is a Plan Document? A 401(k) plan is considered a qualified retirement plan by the Internal Revenue Service (IRS), and as such, must meet certain requirements to take advantage of significant tax benefits. Every 401(k) retirement plan is required to have a plan document that outlines how the plan is to be operated. The plan document should reflect your organization’s objectives in sponsoring the 401(k) plan, including information such as plan eligibility requirements, contribution formulas, vesting requirements, loan provisions, and distribution requirements. As regulations change or your organization changes plan features and/or rules, the plan document will need to be amended. Your provider will likely draft your plan’s document, but because of your fiduciary duty, it is important that you as plan sponsor review your plan document, understand it, and refer to it if questions arise. Whether you are a small business or a large corporation, failure to operate the plan in a manner consistent with the document as written can result in penalties from the IRS and/or the Department of Labor (DOL). Understanding Your Fiduciary Responsibilities Although any given 401(k) plan may have multiple (and multiple types of) fiduciaries based on specific plan functions, the plan document identifies the plan’s “Named Fiduciary” who holds the ultimate authority over the plan and is responsible for the plan’s operations, administration and investments. Typically the employer as plan sponsor is the Named Fiduciary. The employer is also the “plan administrator” with responsibility for overall plan governance. While certain fiduciary responsibilities may be delegated to third parties, fiduciary responsibility can never be fully eliminated or transferred. All fiduciaries are subject to the five cornerstone rules of ERISA (Employee Retirement Income Security Act) when managing the plan’s investments and making decisions regarding plan operations: Acting solely in the interest of plan participants and their beneficiaries and with the exclusive purpose of providing benefits to them; Carrying out their duties prudently; Following the plan documents (unless inconsistent with ERISA); Diversifying plan investments; and Paying only reasonable plan expenses. One of the best ways to demonstrate that you have fulfilled your fiduciary responsibilities is to document your decision-making processes. Many plan sponsors establish a formal 401(k) plan committee to help ensure that decisions are appropriately discussed and documented. Which Type of 401(k) Plan is Best for Your Organization? The plan document will identify the basic plan type: Traditional 401(k) plans provide maximum flexibility with respect to employer contributions and associated vesting schedules (defining when those contributions become owned by the employee). However, these plans are subject to annual nondiscrimination testing to ensure that the plan benefits all employees—not just business owners or highly compensated employees (HCEs). Safe Harbor 401(k) plans are deemed to pass certain nondiscrimination tests but require employers to contribute to the plan on behalf of employees. This mandatory employer contribution must vest immediately—rather than on a graded or cliff vesting schedule. QACA Safe Harbor plans are an exception, which may have up to a two-year cliff vesting schedule. Profit-sharing 401(k) plans include an additional component that allows employers to make more significant contributions to their employee accounts. Besides helping to attract and retain talent, small businesses can find this feature especially helpful In highly profitable years, since it reduces taxable income. There is no one plan type that is better than another, but this flexibility allows you to determine which type makes the most sense for your organization. Eligibility Requirements to Meet Your Needs Although the IRS mandates that employees age 21 or older with at least 1 year of service are eligible to make employee deferrals, employers do have considerable flexibility in setting 401(k) plan eligibility: Age -- employers often choose to adopt a minimum age of 18. Service -- employers can establish requirements on elapsed time or hours. Entry date -- employers may allow employees to participate in the plan immediately upon hiring but often require some waiting period. For example, employees may have to wait until the first of the month or quarter following their hire date. This flexibility allows employers to adopt eligibility requirements appropriate to their business needs. For instance, a company with high turnover or lots of seasonal workers may institute a waiting period to reduce the number of small balance accounts and the associated administrative costs. Automatic Enrollment Is Now the Standard for 401(k) Plans Under the SECURE 2.0 Act, which became effective on December 29, 2022, automatic enrollment has become the new standard. The provision requires that 401(k) plans established after that date were required to include automatic enrollment no later than January 1, 2025. Eligible employees will have a set percentage of each paycheck automatically deferred and contributed to the plan—unless they choose to opt out or adjust their contribution rate. Certain plans, such as those created before that date or sponsored by small businesses, churches, or government employers, are exempt and may continue to use voluntary enrollment. The benefit of automatic enrollment is that human inertia means most employees take no action and start saving for their future. In fact, according to the Congressional Research Service (2024), automatic enrollment 401(k) plans have participation rates of about 90%, compared to about 70% for plans with voluntary (opt-in) enrollment. Employee Contribution Flexibility Provides Valuable Flexibility The plan document will specify the types of contributions (or “elective deferrals”) that eligible employees can make to the plan via payroll deduction. Typically these will be either pre-tax contributions or Roth (made with after-tax dollars) contributions. Allowing plan participants to decide when to pay the taxes on their contributions can provide meaningful flexibility and tax diversification benefits. Elective deferrals are often expressed as either a flat dollar amount or as a percentage of compensation. Employee contribution limits are determined each year by the IRS. The plan document must specify whether the plan will allow catch-up contributions for those age 50 and older. Able and/or Willing to Contribute to Employee Accounts? The plan document will also include provisions regarding employer contributions, which can be made on either a matching or non-matching basis. Matching contributions are often used to incentivize employees to participate in the plan. For example, an employer may match 50% of every $1 an employee contributes, up to a maximum of 6% of compensation. For traditional 401(k) plans, matching contributions can be discretionary so that the employer can determine not only how much to contribute in any given year but whether or not to contribute at all. As stated above, matching employer contributions are required for Safe Harbor 401(k) plans. The plan document may also permit the employer to make contributions other than matching contributions. These so-called “nonelective” contributions would be made on behalf of all employees who are considered plan participants, regardless of whether they are actively contributing. Vesting Schedules and Employee Retention Vesting simply means ownership. Employees own, or are fully vested, in their own contributions at all times. Employers with traditional 401(k) plans, however, often impose a vesting schedule on company contributions to encourage employee retention. Although there are a wide variety of approaches to vesting, one of the most common is to use a graded vesting schedule. For instance, an employee would vest in the employer contribution at a rate of 25% each year and be 100% vested after 4 years. Employer contributions as part of Safe Harbor 401(k) plans are vested immediately, aside from QACA Safe Harbor plans. Let Betterment help you create a 401(k) that works for you and your employees As a full-service provider, Betterment aims to make life easy for you. We will draft your plan document based on your preferences and our industry expertise of best practices. We will work with you to keep your plan in compliance and can prepare amendments based on your changing needs. Want to learn more about offering a Betterment 401(k)? Get in touch.
A 50-state guide to state-mandated retirement plans [2025]
A 50-state guide to state-mandated retirement plans [2025] All but three states have either active mandates in place or are working towards implementing mandated retirement programs. Check your state to see how your business may be impacted. Table of contents: All active state mandate programs In-progress state mandate programs States with legislation being considered Unknown state mandate programs The retirement landscape is changing rapidly, with many Americans living longer but saving less for their golden years. One of the most significant developments in this space has been the rise of state-mandated retirement plans. These plans are designed to provide essential benefits to workers who may not have access to them through their employer. With a growing number of private workers not having access to these crucial benefits, states are increasingly requiring businesses to provide retirement plans to employees. In 2015, the Department of Labor (DOL) issued guidance to support the states' efforts to help promote retirement benefits within their respective states. What exactly are state-mandated retirement plans? In recent years, more states have passed legislation requiring businesses to provide retirement benefits for their employees. In these states, employers have the choice between enrolling their workers in the state-sponsored program or establishing their own workplace retirement plan through providers like Betterment. A state-sponsored plan usually involves an Individual Retirement Account (IRA) set up by the employer for participants to contribute. However, certain features may vary between states, so it's a good idea to research your state's specific program to ensure compliance. All but three states are currently working on legislation to implement these plans, which means that more and more Americans will have access to the retirement benefits they need. However, it's important to stay up-to-date on these changes, as failing to comply with the new rules could result in hefty fines. For more details on how state-mandated plans could impact you, read: What state-mandated plans could mean for your small business. All active state mandate programs The following states have enacted legislation and have either implemented or are in the process of implementing a state-mandated program. California Plan Name: CalSavers Status: Mandate in place Deadlines: Deadline passed for 5+ employees; December 31, 2025, for 1-4 employees Details: Not all employers are required to participate. Only employers who do not sponsor a retirement plan and have one or more California employees must join CalSavers. Fines: $250 per eligible employee Illinois Plan Name: Illinois Secure Choice Status: Mandate in place Deadlines: Deadline passed for 5+ employees Details: Not all employers are eligible. Only private-sector employers who do not offer a qualified retirement plan, had at least five employees in every quarter of the previous calendar year, and have been in business for at least two years must facilitate Illinois Secure Choice. Fines: $250 per employee for the first calendar year the employer is non-compliant Oregon Plan Name: OregonSaves Status: Mandate in place Deadlines: Deadline passed for 1+ employees Details: All Oregon employers are required by law to facilitate OregonSaves if they don’t offer a retirement plan for their employees. Fines: $100 per affected employee, with a $5,000 maximum fine per year Connecticut Plan Name: MyCTSavings Status: Mandate in place Deadlines: Deadline passed for 5+ employees Details: Eligible Connecticut businesses are required to facilitate MyCTSavings if they don’t offer a retirement plan and have 5 or more employees. Fines: Penalties may be imposed. Bill is currently in the legislature. Colorado Plan Name: Colorado SecureSavings Program Status: Mandate in place Deadlines: Deadline passed for 5+ employees Details: All Colorado employers who have been in business for at least 2 years, have 5 or more employees, and don’t offer a qualified retirement plan for their employees are required by law to facilitate Colorado SecureSavings. Fines: $100 per affected employee with $5,000 maximum fine per year Maine Plan Name: Maine Retirement Savings Program Status: Mandate in place Deadlines: Deadline passed for 5+ employees Details: Every Maine employer with 5 or more employees will need to facilitate the program if they don’t already offer their own qualified retirement savings plan. Fines: Penalties for failing to enroll employees go into effect on July 1, 2025, as follows: $20 per employee from July 1, 2025, to July 30, 2026 $50 per employee from July 1, 2026, to July 30, 2027 $100 per employee on or after July 1, 2027 Virginia Plan Name: RetirePath Status: Mandate in place Deadlines: Deadline passed for 25+ employees Details: State law requires Virginia employers with 25 or more eligible employees who have operated for 2 or more years and not offered a qualified, employer-sponsored retirement plan must now register and facilitate RetirePath. Fines: $200 per eligible employee New Jersey Plan Name: RetireReady NJ Status: Mandate in place Deadlines: Deadline passed for 40+ employees; November 15, 24 for 25+ employees Details: Every New Jersey employer with 25 or more employees will need to register with the program if they don't already offer their own qualified retirement savings plan. Fines: Businesses that don’t follow state-mandated retirement legislation within one year will receive a written warning. Each following year of non-compliance will result in fines of: 2nd year: $100 per employee 3rd and 4th years: $250 per employee 5th year and beyond: $500 per employee Delaware Plan Name: Delaware EARNS Status: Mandate in place Deadlines: October 15, 2024 for 5+ employees Details: Every Delaware employer with five or more employees will need to facilitate the program if they don’t already offer their own tax-qualified retirement plan. Fines: $250 per affected employee, with $5,000 maximum fine per year Maryland Plan Name: Maryland Saves Status: Mandate in place Deadlines: December 31, 2024 for 1+ employees Details: Businesses are required to register if they have been in operation for at least 2 calendar years, have at least one employee over the age of 18, and use an automated payroll system. Fines: Maryland does not impose a penalty, instead, they use an incentive, offering businesses that enroll $300 per year, waiving the annual filing fee for Maryland businesses. Vermont Plan Name: Vermont Saves Status: Mandatory for Vermont employers with 5+ employees who do not offer a qualified retirement plan. Deadlines: March 1, 2025 for 5+ employees Details: Employees are automatically enrolled in a Roth IRA with a default contribution rate of 5% that increases by 1% annually up to 8%, unless they opt out or select a different rate. Employers are not required to contribute but must facilitate payroll deductions. The program is free for employers and integrates with existing payroll systems. Fines: $10 per employee before October 1, 2025, then $20 per employee until September 30, 2026. After October 1, 2026 employers could pay up to $75 per employee. New York Plan Name: New York State Secure Choice Savings Program Status: Mandatory for eligible employers to offer a retirement plan or enroll workers in the state’s Secure Choice program. Deadlines: Employers with 30 employees must enroll by March 18, 2026 Employers with 15-29 employees must enroll by May 15, 2026 Employers with 10-14 employees must enroll by July 15, 2026 Details: If you’re an employer in New York, state laws require you to offer the Secure Choice Savings Program if you have had 10+ employees during the entire prior calendar year, have been in business for at least two years, and have not offered a qualified retirement plan during the prior two years. Fines: Information not available at this time. Rhode Island Plan Name: RISavers Status: Mandatory for employers with 5+ employees who do not offer a qualified retirement plan. Deadlines: Implementation in progress Details: Private-sector employers with five or more employees will be required to offer a qualified retirement plan or opt into the state-run program. Fines: Information not available at this time. In-progress state mandate programs Nevada Plan Name: Nevada Employee Savings Trust Status: Will be mandatory Deadlines: July 1, 2025 for 1,000+ employees; January 1, 2026 for 500-999 employees; July 1, 2026 for 100-499 employees; Jan 1, 2027 for <100 employees Details: In 2023, the Nevada legislature passed SB305 which mandates the establishment of a retirement savings program for private sector employees. Fines: Information not available at this time. Massachusetts Plan Name: Massachusetts Defined Contribution CORE Plan Status: Nonprofit mandatory only Deadlines: Currently effective, but no deadline yet Details: Massachusetts nonprofit organizations with 20 employees or fewer may be eligible to adopt the CORE Plan. The CORE Plan is structured as a 401(k) Multiple Employer Plan (MEP). The MEP structure allows each adopting employer to join the CORE Plan under one plan and trust by executing a Participation Agreement. Fines: Not applicable. Minnesota Plan Name: Minnesota Secure Choice Retirement Program Act Status: Will be mandatory Deadlines: Expected to launch by Jan 1, 2025 Details: On May 19, 2023, Governor Walz signed into law a bill establishing the Minnesota Secure Choice Retirement Program. Employers with 5 or more covered employees that do not sponsor a retirement plan for their employees are required to participate in the plan. Fines: Information not available at this time. Hawaii Plan Name: Hawaii Retirement Savings Program Status: Will be mandatory Deadlines: Implementation in progress Details: The Hawaii Retirement Savings Program is a state-facilitated payroll-deduction retirement savings plan where individuals can choose to opt into the program. Employers will be required to provide covered employees with written notice that they may opt into the program, withhold covered employees’ contribution amount from their salary or wages, and transmit covered employees’ payroll deduction contributions to the program. Fines: Information not available at this time. Washington Plan Name: Washington Saves Status: Will be mandatory Deadlines: Expected to launch Jan 1, 2027 Details: Employers must offer their employees access to a state-facilitated IRA if they don’t offer a retirement savings plan. Employees would be enrolled automatically unless they opt out. The program is slated to launch in 2027 and Washington will continue to offer its small-business retirement marketplace in the meantime. Fines: Penalties beginning after January 1, 2030. New Mexico Plan Name: New Mexico Work and Save IRA Status: Voluntary Deadlines: 7/1/24 deadline, but still voluntary Details: Work and Save is a voluntary savings program for private-sector and nonprofit employers and employees and the self-employed facilitated through a Roth Individual Retirement Account. Fines: Not applicable. Missouri Plan Name: Missouri Show-Me MyRetirement Savings Plan Status: Voluntary Deadlines: Expected to launch September 1, 2025 Details: Missouri introduced HB 1732 in 2022, which would create a voluntary MEP for small employers with 50 or fewer employees. Fines: Not applicable. Pennsylvania Plan Name: Keystone Saves Status: Will be mandatory Deadlines: To be determined pending bill passage by Pennsylvania State Senate Details: Employers will be required to offer a state-sponsored IRA or other qualified retirement plan. Employers do not have to participate if they have an established retirement program, have fewer than five employees, or have been in business less than 15 months. Fines: According to the current bill, covered employers shall not be subject to a penalty for not participating in the program. Georgia Plan Name: Peach State Saves Status: Voluntary Deadlines: To be determined pending bill passage Details: In February 2025, Georgia introduced SB 226, requiring businesses with 5+ employees and over one year in operation to offer a state-sponsored IRA or another retirement plan unless they already have one.The default payroll deduction is a Roth IRA with a 5% contribution rate. The state may add a traditional IRA option and adjust the contribution rate, increasing it annually by up to 1% (maximum 10%). Fines: Not applicable. States with legislation being considered The following states have legislation currently being considered for state-mandated reprograms: Alaska, Arizona, Arkansas, Idaho, Indiana, Iowa, Kansas, Kentucky, Louisiana, Michigan, Mississippi, Montana, Nebraska, New Hampshire, North Carolina, North Dakota, Ohio, Oklahoma, South Carolina, Tennessee, Texas, Utah, West Virginia, Wisconsin, Wyoming Unknown state mandate programs The following states have not yet made clear if they intend to mandate a state retirement program. We will actively update this article as legislation changes. Alabama Florida South Dakota What do state-mandated plans mean for your business? Now is the time to plan ahead if you do not offer a retirement plan for your employees, especially if you operate in a state with an upcoming mandate deadline. In most cases, you’ll have one of two options: Implement your state’s plan: You’ll need to follow your state’s procedures for enrolling and offering a retirement plan, usually an IRA, to your employees. Implement a 401(k) plan: A second option is to skip the state plan, and instead, offer a 401(k) plan from a private provider like Betterment at Work. The benefits of offering a 401(k) Offering a 401(k) has become a tablestakes benefit as employers attempt to attract and retain talent in today’s competitive environment. State mandated plans are designed by the government to address a lack of savings among employees. The purpose is admirable, but state mandated plans may lack some of the benefits of a modern, 401(k) plan, which include: Higher contributions limits to help people save more. A wider range of investment options depending on the number of funds available. The option to provide an employer matching contribution. (Did you know? A 401(k) employer match is the #2 most desired benefit among employees. Learn more.) Learn how to offer a modern 401(k) today At Betterment, we make it easy for small and mid-market businesses to provide a scalable retirement plan. With a Betterment 401(k), you get: Simplified administration, payroll integrations, fiduciary support, and compliance testing Customizable plan features and optional employee benefits Service and support at every step Learn more
Betterment expands 401(k) investment options with new mutual fund lineup
Betterment expands 401(k) investment options with new mutual fund lineup Betterment now offers mutual funds alongside ETFs and advisor-managed options, giving 401(k) sponsors more flexibility and fiduciary oversight for participants. Key takeaways: Betterment now offers a mutual fund lineup alongside managed ETF portfolios for 401(k) plans. Betterment serves as a 3(38) investment manager, selecting and monitoring investment options for sponsors. Employers can choose from ETFs, mutual funds, or advisor-managed lineups to fit plan needs. Target date and diversified fund options help participants stay aligned with long-term goals. Automated tools and fiduciary oversight simplify plan management and support participant outcomes. How your employees can invest with Betterment Betterment serves as a 3(38) investment manager, meaning we take on the responsibility of selecting, monitoring, and maintaining the investment options offered within your company’s 401(k) plan. We act in the best interests of plan participants, helping you meet your fiduciary responsibilities. When serving as an investment fiduciary, Betterment constructs and oversees the investment options offered through your plan, providing the ongoing management and monitoring needed to help ensure investment options remain appropriate for your participants. Our Investing team is made up of experienced professionals who power this process so your team doesn’t have to handle these day-to-day responsibilities. Betterment’s investment options Betterment offers a range of investment choices designed to meet the diverse needs and preferences of your employees. These include managed ETF portfolios along with a flexible portfolio option, or a traditional mutual fund lineup. Plan sponsors can choose which lineup to use within their plan. For plan sponsors who choose to work with a third-party financial advisor, our platform can host a customized fund lineup as well, where the third party advisor takes on the role of 3(38) or 3(21) investment advisor. The Betterment mutual fund lineup Betterment now offers a mutual fund lineup of diversified funds for employees to invest their 401(k). This lineup includes a relatively low-cost target date fund series (serving as the plan’s QDIA). The target date fund series maintains an embedded glide path that will de-risk and have greater allocation to bonds as the participant nears the retirement year. The lineup also includes a set of mutual funds representing major asset classes such as U.S. and international stocks and bonds, real estate investment trusts (REITs), and a money market fund. More details on the fund lineup can be found here. All these investment options have the benefit of Betterment maintaining fiduciary oversight as the 3(38) investment manager. Betterment’s managed ETF portfolios and “Build-your-own” Our flagship, and most commonly used, investment offering includes a broad range of professionally managed ETF portfolios. Most of these portfolios feature 101 risk levels, functioning similarly to target date funds, but with a glide path that adjusts based on each employee’s time horizon, goals, and preferences. The Betterment Core portfolio The Betterment Core portfolio serves as the plan’s qualified default investment alternative (QDIA) and where employees commonly invest. It’s a globally diversified, cost-effective portfolio that invests across major asset classes and markets. Employees can also choose among related strategies with certain market tilts, that share the same global diversification framework of the Core portfolio: Value Tilt portfolio: Focused on U.S. companies considered undervalued based on certain financial metrics. Innovative Technology portfolio: Provides exposure to high-growth sectors such as clean energy, semiconductors, and robotics, offering additional risk and return potential. The Socially Responsible Investing portfolios For employees who want their investments to reflect certain values, Betterment offers three Socially Responsible Investing (SRI) portfolios: Broad Impact portfolio Social Impact portfolio Climate Impact portfolio Each offers a different focus within environmental, social, and governance (ESG) investing principles. Third-party partner portfolios Betterment also partners with leading asset managers to expand investment choice: Goldman Sachs Smart Beta portfolio: A diversified ETF portfolio that uses a factor-based approach to target potential long-term outperformance relative to traditional market indexes. BlackRock Target Income portfolio: A 100% bond ETF portfolio designed for income generation and lower volatility, an option that may be more suitable for participants with shorter time horizons or those already in retirement. Flexible portfolios (“Build-your-own”) Flexible portfolio provides employees the ability to build their own portfolio with the funds and asset classes that we have curated. As they build their own portfolio, employees will receive guidance on whether the portfolio they are building is diversified enough or too risky depending on our recommendation on how they should be invested, based on their time horizon. More details on each of the strategies can be found here. Using a third-party financial advisor Some plans may prefer to work with a third-party advisor who either serves in the 3(21) or 3(38) investment manager capacity. A 3(21) is different from a 3(38) in that the investment advisor has non-discretionary authority and can only make recommendations that must then be approved by the plan sponsor, as the fiduciary for the plan. If you prefer to bring on an advisor to curate a custom lineup, the advisor has access to over 10,000 mutual funds and ETFs to choose from. Automation makes investing for retirement easier Along with each of these investment options, employees have access to automated tools designed to help make saving for retirement simpler and more efficient. Betterment’s technology supports employees by: Automatically rebalancing portfolios: Portfolios are periodically rebalanced to maintain their target allocations due to allocation changes or market drifts. We also use contributions, withdrawals, and dividends to help keep investments aligned with the target. Applying Tax Coordinated Portfolios (TCP): Also known as asset location, this feature places less tax-efficient assets in more tax-advantaged accounts, such as traditional or Roth 401(k)s, while maintaining an overall portfolio allocation across account types. This approach is designed to help improve after-tax outcomes over time. Providing personalized guidance: Employees can access in-app tools and educational resources to help determine how much to save and how to allocate their investments based on their goals and timelines. Saving for retirement is important, and Betterment’s automated features are built to help make the process easier for employees. Email 401k@betterment.com to learn more about investment options and features.
