Information Resources

401(k) Overview
What Is a 401k?

A 401(k) is a pre-tax retirement savings plan sponsored by an employer. It lets workers save and invest a piece of their paycheck before taxes are taken out. Employees invest a portion of their paycheck into the plan. These scheduled contributions are sometimes matched by employers. The participant can select the funds he or she wants to invest in; and typically the plan sponsor uses an advisor to help manage the 401(k). Taxes aren't paid until the money is withdrawn from the account.

With a 401(k), participants control how their money is invested. Most plans offer a spread of mutual funds composed of stocks, bonds, and money market investments. Most plans offer more than one type of fund, however a popular option tends to be target-date funds, a combination of stocks and bonds that gradually become more conservative as you reach retirement. As with any investment, do your research, as each fund may have different fee requirements. Your advisor can assist you in deciding which funds may be right for you. Visit the Financial Resource Center to learn more. You may also use the calculators on the right side of this page when planning for retirement.

History of 401(k) plans

401(k) plans are also called Cash or Deferred Arrangement (CODA) plans, but are commonly referred to as 401(k) plans due to the section of the tax code that governs them. 401(k) plans arose during the 1980s as a supplement to pensions. Most employers used to offer pension plans. Pension plans were managed by the employer and they paid out a steady income over the course of the retirement. But as the cost of running pension plans escalated, employers started replacing them with 401(k) plans.

What is Vesting?

While a 401(k) can help you save, it has restrictions. In most cases, employees can't access their employer's contributions immediately. Vesting is the amount of time an employee must work for your company before gaining access to the contributions made by the employer to your 401(k). (Your payments, on the other hand, vest immediately.) Vesting serves an insurance against employees leaving early. On top of that, there are rules about when participants can withdraw your money and penalties for pulling funds out before retirement age.

401(k) Rules
There are 401(k) rules about Contributions and Distributions. Contributions and the earnings attributable to them grow tax-advantaged until they are withdrawn. 401(k) contribution rules:
  • Employees contribute to their accounts through salary reductions.
  • The current salary reduction limit in 2016 is $18,000.
  • Employers may make matching contributions equal to a certain percentage of amounts contributed by their employees
  • Employers may contribute for employees who are age 70-1/2 or older, as long as those employees have earned income.
  • Employers are entitled to certain tax deductions based on their matching plan contributions.
Distribution options can vary by plan, however most plans do not allow distributions unless one of the following "triggering" events occur:
  • Attainment of age 59-1/2
  • Disability or Financial hardship
  • Separation from service (leaving the company)
  • Death
  • The plan terminates

Why Offer a 401(k)?

A majority of small businesses owners question if they should sponsor a 401(k) retirement plan. When deciding if a 401(k) plan is right for your business, look at the benefits that other plan sponsors have discovered by offering their employees a retirement plan from DST Prime Plan Solutions.

  • Helps you attract and retain high-quality employees
    Small businesses must find the best talent to help their company grow and differentiate itself among the number of employers offering benefits in the marketplace. Offering a 401(k) plan is an affordable way to do it. Establishing a plan communicates loyalty to employees and offers assistance in their long-term financial success.
  • Tools to manage the plan easily
    Comprehensive 401(k) plan  education programs reduce the need for costly printed materials and onsite representatives. Run plan performance reports online, receive annual newsletters discussing new developments, and if any questions do arise, a support team is just a call away to answer questions about fund availability, account maintenance questions, compliance requirements, and more.

  • Secure your own retirement
    Small business owners often forget about themselves and their personal retirement. A 401(k) is a good vehicle when the day comes to retire or focus attention away from running a business. Each plan allows the business owner to contribute to their plan.

  • Receive a tax credit
    When starting a new plan that covers at least one non-highly compensated employee, small businesses may qualify for a 50 percent tax credit on the first $1,000 of administrative expenses or set up costs for each of the plan's first three years. Additionally, the business may be entitled to a federal tax deductions based on contributions to employees' accounts. Contact us, your advisor, or a tax professional for more information about the criteria used by the Internal Revenue Service in determining the deduction of a retirement plan contribution.

Fund Types
Mutual funds are one of the most popular ways to invest due to their flexibility and convenience. Experienced investors, as well as individuals who are just starting to invest, can use mutual funds to help achieve their investment goals.
Why Invest in Mutual Funds?
Mutual funds provide investors with several advantages. These include:
  • Diversification: Investing in a mutual fund is generally less risky than investing in a single security (such as the stock of one company) because a mutual fund is already diversified. If one or more of a fund's investments lose value, others may gain value or hold steady, helping to cushion the losses. To provide additional diversification, individuals can invest in several different types of funds. However, diversification does not ensure a profit or protect against loss in a declining market.
  • Professional management: A variety of economic, political, and financial factors can influence the value of securities. Fund managers have access to resources that allow them to analyze relevant data and screen a universe of securities to identify those with the greatest potential.
  • Liquidity: Shares in mutual funds generally can be bought and redeemed every day the markets are open.
  • Convenience: Investing in a mutual fund is often only a phone call or a mouse click away. Many funds require only a small initial investment, and subsequent purchases often require a modest minimum investment also.
What Is a Mutual Fund?

A mutual fund is an investment company that pools the money from investors who buy shares of the fund. A professional investment advisor(s) manages the pooled money as a single account, investing in a variety of securities that reflect the fund's goals. A mutual fund may hold hundreds of different securities in its portfolio. A mutual fund seeks to make money for investors by earning dividend or interest income on the securities in the fund's portfolio and by selling investments that have increased in price.

Mutual funds distribute most of their income (net of expenses) to their shareholders in the form of periodic dividends. Distributions of net capital gains generally are made at the end of the year. Investors usually have a choice of reinvesting their dividends and distributions in additional fund shares or receiving a check (or other form of payment). Mutual fund shares are bought and redeemed (sold back to the fund) at the fund's current "net asset value" (NAV) per share. The NAV reflects the value of the fund's assets minus its liabilities. A fund's NAV fluctuates almost daily as the values of its holdings change.

Some funds impose shareholder fees when shares are purchased or redeemed. In addition, funds have annual operating expenses and fees that lower investor returns. Investors can find information about these charges in a fund's prospectus.

Major Mutual Fund Categories

There are two broad categories of mutual funds – passive and actively managed. Passive funds, also called index funds, attempt to replicate the performance of a broad market – or a market segment – by buying the same securities that make up a market index, such as the Standard & Poor's 500 Index (an index of the stocks of 500 major corporations). With an actively managed fund, the fund's managers actively direct the portfolio in an attempt to outperform market benchmarks. Numerous types of funds are available within these broad categories.

Stock funds
Within the stock fund category, there are funds composed solely of large-, mid-, or small-capitalization stocks. Capitalization is simply the total dollar value of a company's stock at any one point in time, as measured by the number of outstanding shares multiplied by the stock's price. Although different managers may use different dollar ranges to assess whether a stock is a large-, mid-, or small-cap stock, in general:
  • Large-capitalization funds hold stocks of large, well-known companies. They offer the potential for long-term capital appreciation.
  • Mid-capitalization funds hold stocks of medium-sized companies. Like large-capitalization funds, they offer the potential for long-term growth.
  • Small-capitalization funds generally own shares in companies in the early stages of their growth, whose shares could rise (or fall) in value significantly.

Stock funds also may follow a growth or value strategy. Growth stocks are stocks of companies thought to be capable of higher than average earnings growth. Value stocks are considered to be "bargain priced," since they are priced lower than stocks of similar companies in the same industry. The premise behind value investing is that the stocks may realize their potential down the road, and investors will reap the profits.

Stock investing involves a high degree of risk. Stock prices fluctuate, and investors may lose money.

Bond funds

Some bond funds hold only U.S. government bonds, while others specialize in municipal securities or corporate bonds. Other funds hold a combination of government and corporate securities. Likewise, some bond funds hold only bonds with long maturities, others specialize in shorter term debt, and still others hold a combination of both. During periods of stock market volatility, bonds may provide some stability, since they often increase in value when stock values fall. A portfolio that includes funds holding intermediate- or long-term bonds commonly has the potential to earn returns that are greater than the rate of inflation. As with any investment, however, bond investors face various risks. For example, bond prices often fluctuate due to interest rate changes. Experienced bond fund managers understand these risks and take a variety of steps intended to manage them.

Money market mutual funds

These funds invest in what are widely considered to be low-risk, short-term investments, such as Treasury bills and certificates of deposit (CDs). Typically, money market funds try to maintain a stable $1 per share value, although it is possible for investors to lose money. An investment in a money market mutual fund is not insured or guaranteed by the Federal Deposit Insurance Corporation or any other government agency. Since the risk of losing money is low, the total return of a money market fund is typically relatively low. Returns may not keep pace with the annual inflation rate.

Other Types of Funds

The mutual fund universe has many other variations within these main themes. For instance, balanced funds hold stocks and bonds in their portfolios to provide the potential for both growth and income. International funds hold shares in non-U.S. companies and/or bonds of foreign governments and corporations. Sector funds focus on the stocks of a specific industry or segment of the economy, such as energy, health sciences, utilities, or technology.

Your financial professional can tell you more about mutual funds and discuss how investing in mutual funds could fit into your overall financial plan.

Industry Terms
ACP Test

Actual Contribution Percentage is a type of nondiscrimination test used to determine if highly compensated employees received more employer matching contributions than non-highly compensated employees.

ADP Test

Actual Deferral Percentage is a type of nondiscrimination test used to determine if highly compensated employees contributed more salary deferral contributions than  non-highly compensated employees.

Automated Clearing House (ACH)

Automated Clearing House (ACH) is a payment mechanism that replaces paper checks with electronic transactions. DST Prime Plan Solutions  utilizes this mechanism to transmit contributions from your company payroll, checking, or other designated account to the mutual funds selected for your plan. Transmitting payrolls electronically prevents the possibility of lost or stolen checks and enables timelier investments. View how this works within the enrollment process

Company Match

Money that some employers contribute to their employees' employer-sponsored plan accounts. Also called Employer Match.


Amount of salary earned by an employee and used to calculate plan contributions. Compensation for plan purposes is limited to $260,000 in 2016 regardless of the actual amount earned.

Compliance Test

Tests performed to ensure a plan does not discriminate in favor of Highly Compensated Employees or Key Employees. Also called Nondiscrimination Testing.

Default Investments / Qualified Default Investment Alternatives (QDIA):

The Pension Protection Act of 2006 created a "safe harbor" for plan sponsors in selecting a default investment option to be used for participants who fail to make an investment election for any employee or employer contribution that provides additional fiduciary protections. In order for your plan's default investment to be considered a Qualified Default Investment Alternative, certain requirements must be met. As defined by the regulations, the investments that qualify as QDIAs are target date maturity funds, balanced funds and managed accounts. In addition to having the qualifying investment, there are requirements in the regulations that provide for: participant notification, fund investment information, exchange capability, and the limiting of additional fees. The administrative services included with this program are designed to support you in your fiduciary obligations by including several mutual funds that meet the definition of a qualifying investment.


Participants can choose to set aside part of their compensation on a pretax basis via payroll deduction.


The Employee Retirement Income Security Act of 1974 is a federal law that sets minimum standards for retirement plans in private industry.

Fidelity Bond:

The IRS requires all qualified plans that cover non-owner employees to carry a Fidelity Bond covering 10% of the plan's total assets equal to a minimum of $1,000 and a maximum of $500,000. Typically, Fidelity Bonds carry a three-year premium ranging from $250-$300. Contact your current business insurance agent to discuss adding this coverage to your existing policy.

Form 5500

Form 5500 is the IRS document used to report information concerning employee benefit plans. An administrator or sponsor of an qualified retirement plan subject to ERISA must file information about the plan each year.

Highly Compensated Employee

Any eligible employee who was a 5% owner in the current or prior year or earned more than a specific dollar amount during the prior plan year and was part of the top-paid 20% group of employees for the prior plan year. That dollar amount is $120,000 in 2016.

Integrated Profit Sharing

A calculation method for allocating profit sharing incorporating the Social Security wage base. Employee who earn more than the social security wage base ($118,500 in 2016) receive a larger share of the profit sharing contribution.

Key Employee

An employee who, at any time during the plan year, is: 1. An officer having annual compensation greater than $170,000 (subject to cost-of-living adjustments); 2. A 5% owner (and some relatives of a 5% owner); or 3. A 1% owner whose annual compensation exceeds $150,000

Non-Highly Compensated Employee

Any employee who is not considered a Highly Compensated Employee.

Nondiscrimination Testing

Tests performed to ensure a plan does not discriminate in favor of Highly Compensated or Key Employees. Actual Deferral Percentage (ADP) and Actual Contribution Percentage (ACP) are two examples of these tests. Also called Compliance Testing.


Any employee of the company who is eligible to participate in the 401(k) plan

Plan Sponsor

A small business owner or company is referred to as a "Plan Sponsor" because they sponsor the 401(k) plan for their employees

Pro-rata profit sharing

A calculation method for allocating profit sharing based on the employee's share of the eligible payroll.

Top Heavy

The total of the accounts of all Key Employees exceeds 60% of the total of the accounts of all employees. Generally, the determination date is the last day of the prior plan year-end.

Top Paid Group

The highest paid 20% of employees. Determining the Top Paid Group is advantageous to employers with a larger number of HCEs because only the members of the Top Paid Group are then treated as HCEs for Compliance Testing. Your plan document automatically includes the Top Paid Group election.

Safe Harbor

A 401(k) plan which is designed to automatically satisfy the ADP, ACP, and in general the Top Heavy Test. Generally, an employer must make guaranteed matching contributions with immediate vesting.


The process by which employees accrue non-forfeitable rights to the employer contributions made to their retirement account. These rights generally accrue based on the number of years of service, referred to as the vesting schedule.