Deciding on Eligibility
First you've got to determine who will be eligible to participate in the 401k plan. This will depend on your objectives.

For example, let's say attracting valuable employees is your primary goal. As long as employee turnover is relatively low, then lowering or even dropping eligibility requirements may work to your advantage.

On the other hand, if your business operates in an industry where turnover is high, delaying eligibility to participate in a 401k plan may be a smart move on your part. You may want to consider requiring new hires to be working for six months or a year before they can enroll.

Employer Contributions and Vesting Schedules
One of the most effective ways to increase employee participation in a 401k plan and and raise satisfaction is to offer matching employer contributions. This means that your company will match a certain percentage of what employees contribute, such as 50 cents for every dollar.

But take note: While employee contributions made through salary deductions automatically become his or her property, this is not necessarily the case with matching employer contributions.

Most likely, your firm will develop a vesting schedule, whereby employees are required to work at the firm for several years before assuming full ownership of the matching contributions.

Investment Choices
Which investments to choose? For the majority of employees participating in 401k plans, this will be the most difficult decision they will have to make.

That's why it's important that you provide a selection of investment choices (a minimum of three alternatives), ranging from bonds and conservative mutual funds for older employees to high-growth mutual funds for younger workers who can afford greater risk.

Furthermore, give employees ample opportunity to rethink which funds they want to invest in. Opportunities to change investments should be provided several times a year--at least quarterly, or even bi-monthly.

Loans and Hardship Withdrawals
In general, employees face sharp tax penalties if they withdraw money from their 401k accounts before age 59 1/2.

Nevertheless, your business has the option of setting up a 401k plan that allows participants to access their accounts under special circumstances, including hardship withdrawals or taking out a loan to buy a house or pay for education.

You'll need to factor in the extra costs of providing this option before setting up your 401k plan.