Are you getting the most out of your employer 401(k) match? A high-income earner who frontloads contributions in the beginning of the year could be losing thousands of dollars in free employer matching money. Yikes!
�The industry has a tendency to talk in formulas and jargon and that doesn�t always translate with individuals,� says Catherine Golladay, vice president of 401(k) education and advice at Charles Schwab. But hear this: it�s gravy; here�s help to collect it, all of it.
Different employers have different ways of figuring the match�that is, how much your employer contributes to your 401(k) account. The problem is that depending on the match formula, employees can lose part of the match. Most employers do it on a payroll basis, contributing a little bit with each paycheck, �matching� the amount the employee saves out of each paycheck. A common formula is to match 50% of employee contributions up to the first 6% of salary.
Look who that can hurt. If you�re saving just 3% of salary, you�re missing out on half of the potential match. Many employers automatically start employees at a 3% savings rate if they don�t opt out or elect otherwise. Don�t be fooled thinking your employer has your best interest at heart; it costs your employer to provide the match after all. Bump up your savings rate to 6% to grab the full match.
High earners trying to save the max run into another problem. They�ll often want to contribute as soon as they have the salary (or bonus) to do so. But watch out. Here�s an example of how that can backfire, courtesy of Schwab�s Gollady.
Take an employee under age 50 earning $240,000 who elected to have 25% of salary deferred at a company that provides a 50% match on the first 6% of compensation. (The company kicks in its matching amount each pay period that the employee contributes). She would have contributed the maximum $17,000 by April 15, giving her a match of $2,100. By contrast, if she spread out her contributions throughout the calendar year, she would get a match of $7,200.
Some plans have what�s called a �true-up� feature to help you get the maximum match. The employer looks at your account to determine if the average percentage you contributed would have resulted in a larger match; it that�s the case, the employer makes a �true-up� contribution. Check with your plan provider and/or your benefits department.
For 2012, the maximum an employee can contribute to a 401(k) is $17,000, up from $16,500 in 2011. For those 50 and older, in addition to the new $17,000 max, they can contribute an additional $5,500 a year as a catch-up, so the total annual contribution for these folks would be $22,500.
For folks who really want to be sure they�re saving the $17,000, they need to check that the percentage they�ve set to contribute will get them there, says Beth McHugh, vice president of market insights with Fidelity Investments. In a December Fidelity survey, only 31% of those surveyed knew that the contribution limit had changed for 2012, and given a list of choices, only 20% of those surveyed could correctly identify the new limit for 2012 as $17,000 with a $5,500 catchup.
Some employers will let you pick a fixed amount (instead of a percentage) to contribute each pay period. The danger with doing that is that if you neglect to revise the amount in a year when the dollar contribution limit goes up based on inflation, you�ve lost out on saving the max.
January is a good time for a 401(k) checkup. Look at your first paystub. McHugh recommends 401(k) savers first take stock to make sure they�re taking full advantage of their employer match, and second, double check that they are saving as much as they can. Typically you can change your contribution amount at any time during the year. The easiest way to do this is online at your plan provider�s web site.
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