401k Changes
Sorry I am posting this a day late. I got sucked into work and forgot.
My company default enrolls new employees into the 401k plan. They sign them up to 2% so they get 1% matched, however, with the new year, the default enrollment will be 3% with a 1.5% match.
The main reason for doing this is to get greater plan participation across all levels. Apparently there is a 401k compliance test that’s done to ensure that the 401k plan is utilized by the entire company instead of just the highest income levels.
I had no idea there was a test till my boss and I got a mysterious email about the test, followed by a friendly email from our delightful CEO. How I do love calling him that!
Anyway some other really cool stuff:
1. I can now defer up to 50% of my salary, which means I can front load all my contributions for the year. “Invest early and often” as the mantra goes. That means I can taper off my contributions at the end of the year. Beyond 20% plan limits for the tax benefit, any further income deferred into the plan is still taxed, so most places don’t recommend actually exceeding 20%/$15,500 for the year. But it’s nice to stuff all the money in early.
2. For people who are automatically enrolled at the default rate, they will slowly increase your contribution rate by 1% annually till you hit 5%, and max out the corporate matching contribution. This is kind of cool, but I’d hate it if I were really young and needed the cash just to pay my student loans at 7-8% interest. Reitrement is great and all, but I kind of resented Safe Harbor clauses in the first 403b I had in my first job. They took 7% when I could scarcely afford it! And they wonder why I left that job early. Harumph.
By the way, if a company chooses Safe Harbor, they no longer have to do a compliance test.
Anyhow, this is just another alert to be on the lookout for changes in your plan and to make sure you know what’s out there in terms of plan options and features about which you may want to inquire.
Sistah Ant wrote:
I don’t think it’s fair for anyone to decide how much a person should defer to retirement except that person. I think it should be enough to educate folks and let deferment be its own reward, or give incentives to participants. But you’re right, folks just starting out might really need that money.
Posted on 26-Oct-07 at 11:22 am | Permalink
HC wrote:
It doesn’t seem like it follows that safe harbor prevents opting out. It’s supposed to be the employer’s burden to make the matching/nonelective contributions, yes?
That said, I had scads of student loans and I still started out with 7.5% contributions, so I don’t see an automatic 1% with annual tickups as all that onerous.
Posted on 26-Oct-07 at 12:50 pm | Permalink
mapgirl wrote:
HC - You’re right. It’s not THAT onerous. So no big deal for most people. But I am going to bet every year when it’s time for the uptick, people are going to be surprised!
Posted on 26-Oct-07 at 1:10 pm | Permalink
BD wrote:
What’s this 20% limit? I’ve never heard of that - I thought the only IRS limit was $15,500 for the year.
And all the young people who want to contribute less still can. All they have to do is tell HR what to do. All your company has done is change the default - what will happen if employees are too lazy to actively make a decision about their contribution levels.
Posted on 26-Oct-07 at 1:36 pm | Permalink
Stephanie wrote:
Do you have any recommendations on how to get an employer to match 401(k) contributions? I’ve been hoping for a year now that they might happen, but I guess working at a startup, it’s not so easy to give away money…still, we do have a good benefits package, so I shouldn’t complain!
Posted on 26-Oct-07 at 1:51 pm | Permalink
dimes wrote:
1% per year uptick is surprising? Don’t people get inflation and cost of living increases that would help to offset that anyway?
I’m just worried that unless people are forced to save for retirement, a whole lot of them won’t bother.
Posted on 26-Oct-07 at 3:21 pm | Permalink
Asset Gatherer wrote:
I wonder if new employees will start getting the “automatic contribution” that the company pulls from your paycheck for you in addition to the salary they expect.
Posted on 26-Oct-07 at 3:45 pm | Permalink
Tiara wrote:
As far as I know, no level of 401k contribution is mandatory–all an employee has to do is fill out paperwork stating they don’t want to participate in the plan.
Posted on 26-Oct-07 at 4:19 pm | Permalink
E.C. wrote:
It sounds like your company’s method for meeting the compliance test is pretty sensible. At my father’s company, they restrict how much he can contribute to less than the $15,500 allowable by law as a way to make sure higher paid employees don’t disproportionately benefit.
Posted on 28-Oct-07 at 11:21 pm | Permalink
mapgirl wrote:
HC - When I had Safe Harbor in a 403b, I had no choice but to contribute. They didn’t make the contribution or a match. They made me do it.
BD - 20% contribution limit is very common in a 401k plan. There are limits to what you can contribute. I think the last 3 or 4 places I worked at 20% as the limit. Therefore if you make only $30K, you cannot contribute more than $6K of your salary into the plan.
Stephanie - Ask your HR department that you would like the benefit of a 401k plan. Understand though that many small companies cannot have one because it costs them too much to implement. For you, try an private Traditional IRA. All you can do is get your co-workers to demand one with you.
Tiara - Maybe you are right. I can no longer find Safe Harbor on the university website where I worked. I am also starting to think that it was the Defined Contribution plan, which was held under a 403b, but perhaps not the same thing. Hard to tell from the documentation. Maybe it was the university pension plan under CalPERS. But I can swear to you that the Plan administrator (i.e. NOT CalPERS, but a major financial institution) classed it as a 403b, because years later they still had the account on file as inactive.
Posted on 29-Oct-07 at 10:23 am | Permalink