Last updated: 1/9/2019
Are you maxing out your retirement plan at work (401k, etc)? Does your employer offer a matching contribution? If you answered yes to both of those questions, this email is specifically for you. Because you might be missing out on free money. Work retirement plans may include 401k plans, 403b plans, 457 plans, etc. For the purpose of this email, I will talk about the 401k since the 401k is the most common.
First, what is the maximum you can contribute to your 401k? In 2019, the contribution limit for anybody under the age of 50 is $19,000. For people age 50 and over, your contribution limit is $25,000.
So what's the problem? The potential problem arises when you have an employer who provides matching contributions AND you max out your 401k plan BEFORE the end of the year. Why might that be a problem? Because once you have maxed out your 401k plan, you have to stop making contributions. And when you stop making contributions, your employer has no contributions to match. So you might be missing out on some of your employer's matching contributions. Matching contributions are like receiving free money. So unless you don't like free money, you don't want to miss any matching contributions.
Here's an example: Let's say you are 40 years old, make $500,000 per year, contribute 5% of your income to your 401k, and every paycheck, your employer matches 100% of your contributions up to 3% of your income. Well, 5% of $500,000 is $25,000. But remember, the maximum you can contribute is $19,000. So if you are contributing 5% of your $500,000 income, you will have reached your $19,000 maximum in early October (assuming your income and contributions are spread out evenly over the year), and then you will have to stop making contributions. After you stop making contributions, there's a chance your employer might also stop making matching contributions...because they don't have anything to match. If your employer stops making matching contributions, you will have missed out on the final 3 months worth of matching contribution, or in this case, approx $4750 in free money. Remember, matching contributions are like receiving free money.
What should you look for? This problem doesn't affect all 401k plans, so here's what to look for. If your 401k plan has what's known as a "true-up" provision (or "true-up" contribution/feature), you should be fine. A 401k plan with a "true-up" provision should make sure you don't miss any matching contributions you would normally be entitled to, even if you max out your 401k plan before the end of the year. Any "true-up" contributions are normally made at the end of the year, or at the beginning of the next year. But don't bank on this. According to a 2015 survey by Deloitte, only approx 45% of 401k plans in the survey offered a "true-up" provision. So that means approx 55% of the 401k plans in the survey did NOT offer a "true-up" provision. See below for a link to the survey.
What's another thing to look for? When does your employer make the matching contributions? If your employer matches your contributions every pay period, that could be a problem. Because then the matching contributions stop when your contributions stop. If your employer makes a one-time lump sum matching contribution, usually at the end of the year or at the beginning of the next year, then you are most likely okay. But don't bank on this either. Most employers do NOT make one-time lump sum matching contributions. Most employers make their matching contributions when you make your contributions, every pay period. And that could be a problem.
How can you find out if this is a problem with your 401k plan? Ask your human resources department, benefits manager, employer, and/or your 401k plan sponsor about this issue. This is not a very common question, so don't be surprised if they have no idea what you're talking about when you first ask. I suggest forwarding them this email. This email will help explain your concern. Hopefully, they reply back to you with a satisfactory answer.
What else can you do? Spread out your contributions. If your employer does not have a "true-up" provision or does not do one-time lump sum matching contributions, then you need to spread out your contributions over the full year. Don't max out your 401k plan early in the year. To figure this out, divide the maximum annual contribution by your annual income. So in the example I used above, you would divide $19,000 (annual max for anybody under age 50) by $500,000 (annual income). In this case, this person would want to contribute no more than 3.8% of their income ($19,000/$500,000 = 3.8%). At 3.8%, this person would max out their 401k plan at $19,000 and spread out their contributions over the full year so they don't miss any employer matching contributions. Problem solved.
Want to learn more? FINRA is the Financial Industry Regulatory Authority. Here's an alert they put out in January 2016 regarding this issue: FINRA 401k Alert (Click here)
HyLine Bottom Line: If you have an employer who provides matching contributions AND you max out your 401k plan BEFORE the end of the year, be careful. Make sure you aren't missing out on some of your employer's matching contributions. Because matching contributions are like receiving free money.
What can I do at HyLine Wealth to help you with this potential problem? Not much. Unless I am the advisor for your 401k plan, I can just pass along this information to help you. This tip is on me!
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Questions? Don’t hesitate to reach out. If you have questions on anything, feel free to email me at email@example.com or call me at (605) 275-2343.
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Here's a link to the Deloitte survey: Deloitte Survey (Click here)
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