• Guest, The rules for the P & N subforum have been updated to prohibit "ad hominem" or personal attacks against other posters. See the full details in the post "Politics and News Rules & Guidelines."

401K Question

Nov 7, 2000
16,404
3
81
My situation:
I started a new job back in May. The company requires that you work for 6 months before becoming eligible for the 401K plan (roth 401k if it matters). Thats not great, but whatever. So, fastforward to November. I'm finally eligible to contribute. I am well aware of the benefits of a 401K, so I decide I am going to try and hit the max for the year. Fortunately, my plan allows for contributing up to 96% of your paycheck. I get paid on the 1st and 15th.

Anyways, my issue is with the company match. Per the documentation I received, it is described as:
Per Pay period Employer Match: 100% on employee's first 3% of contributions, plus 50% on the next two percent of employee's contribution (4% total).

On my Safe Harbor notice it is described as:
A Matching Contribution in an amount equal tot he sum of 100% of the portion of your Employee 401k Contributions which do not exceed 3% of your Compensation, plus 50% of your Employee 401k Contributions between 3% and 5% of your compensation.

Essentially, it is a 4% matching plan.


My assumption was if I put 15k into the plan, i would get matched to 4% of my compensation (few thousand dollars). Instead, what I am seeing is that even if I contribute my full paycheck, my match is only 2% of that amount, and not 100% of that amount, up to 3% of my annual salary. I guess I assumed compensation meant my annual compensation, but the guy was talking like it was my per pay period compensation.

Is this the way it is commonly interpreted? The guy I spoke to said this is how all 401Ks work... I guess I just want to make sure I'm not getting hosed here.

Anyone have any knowledge or experience. Sorry if this is too long or doesn't make sense... I *said* I was confused!
 

FoBoT

No Lifer
Apr 30, 2001
63,089
12
76
fobot.com
uh, if they match up to 4% , then that means if you contribute 4% of your pay, lets say that is $3000 for a year, then they'll add another $3000 so you'd have $6000 contributed to the 401(k) account for that year
 
Nov 7, 2000
16,404
3
81
Originally posted by: FoBoT
uh, if they match up to 4% , then that means if you contribute 4% of your pay, lets say that is $3000 for a year, then they'll add another $3000 so you'd have $6000 contributed to the 401(k) account for that year
what if you contribute 3000 from a single paycheck?
 

DaveSimmons

Elite Member
Aug 12, 2001
40,730
670
126
I guess I assumed compensation meant my annual compensation, but the guy was talking like it was my per pay period compensation.
All 401ks I've seen work per-pay-period. So if you contributed $ 0 / month to the 401k most of the year, there is no matching for that part of your salary / wages. There is only the 4% matching (paycheck by paycheck) on the paychecks where you contribute.

what if you contribute 3000 from a single paycheck?
That usually isn't possible because the payroll system isn't set up for it (the systems usually cap contributions per paycheck to 10-15%), but if you can talk your employer's HR or office manager into doing it that might work.
 
Nov 7, 2000
16,404
3
81
Originally posted by: DaveSimmons
I guess I assumed compensation meant my annual compensation, but the guy was talking like it was my per pay period compensation.
All 401ks I've seen work per-pay-period. So if you contributed $ 0 / month to the 401k most of the year, there is no matching for that part of your salary / wages. There is only the 4% matching (paycheck by paycheck) on the paychecks where you contribute.

what if you contribute 3000 from a single paycheck?
That usually isn't possible because the payroll system isn't set up for it, but if you can talk your employer's HR or office manager into doing it that might work.
well, contributing the 3000 isn't the problem, the plan allows for that. im just confused on how the matching works in that scenario
 

DaveSimmons

Elite Member
Aug 12, 2001
40,730
670
126
The matching is probably still capped at 4% of that paycheck regardless of how much you take out (say 50% for your $3K).

Unless they do something to override the normal behavior of the payroll system, it's going to treat each pay period separately for the matching, with the limit on matching calculated per period not per year.
 
Nov 7, 2000
16,404
3
81
Originally posted by: DaveSimmons
The matching is probably still capped at 4% of that paycheck regardless of how much you take out (say 50% for your $3K).

Unless they do something to override the normal behavior of the payroll system, it's going to treat each pay period separately for the matching, with the limit on matching calculated per period not per year.
OK Dave, thanks for that information. I guess that really means, if you want to get the full match, you have to contribute EVERY pay period at least the percentage that the match. If you skip a pay period, you LOSE that money forever.

That really sucks if you want to max out your account early in the year... if you aren't contributing every paycheck you are losing match money :(
 

DaveSimmons

Elite Member
Aug 12, 2001
40,730
670
126
On the bright side it forces you to do "dollar cost averaging" of investments in your account, where you buy shares all year instead of in one lump that might be a peak in the share prices.

This year there's been a > 10% difference between the lows and highs of the S&P 500 index, so if you'd bought at the peak you'd be down 10%.
 

CPA

Elite Member
Nov 19, 2001
30,322
4
0
Originally posted by: HardcoreRobot
Originally posted by: DaveSimmons
The matching is probably still capped at 4% of that paycheck regardless of how much you take out (say 50% for your $3K).

Unless they do something to override the normal behavior of the payroll system, it's going to treat each pay period separately for the matching, with the limit on matching calculated per period not per year.
OK Dave, thanks for that information. I guess that really means, if you want to get the full match, you have to contribute EVERY pay period at least the percentage that the match. If you skip a pay period, you LOSE that money forever.

That really sucks if you want to max out your account early in the year... if you aren't contributing every paycheck you are losing match money :(
...or you could work for a company that provides a "top up" to your match if you hit the max by the end of the year. Those companies are few, though. :p
 

dullard

Elite Member
May 21, 2001
22,855
1,086
126
Vesting was invented for two main reasons: (1) Companies are cheap and want to spend as little as possible, (2) companies want to give people an incentive to work longer at that company.

Thus, in your case, you don't get paid retirement benefits if you haven't worked there very long (company is cheap). And you have an incentive to stick around (if you work 6+ months, then you get retirement benefits).

What you want to do is to circumvent all the work the company did. You want to get back all the money that you missed because you weren't there long enough. Think about it, if every new person did that, then they would violate the two statements above. (1) They would have to fork over a lot of money and (2) people could stick around for just 6 months, collect a massive 401K match and then quit.

So, for those reasons, matches are almost always done per paycheck. If you work at a generous/kind company or if you work at a stupid company or if you work at a small company you can probably convince someone to do what you want. If not, you are probably out of luck.

Also, there are many reasons that you DON'T want to max your account out at the beginning of the year (as mentioned above, look up dollar-cost-averaging). And, you don't ever want to miss contributing on a paycheck. Finally, since 401Ks tend to have massive fees, you often don't want to contribute any more to it than you have to (up to where you get the full company match). (1) Contribute to your 401k up to the full match. (2) Open up a seperate retirement account with lower fees, fill that up as much as possible. (3) If you still want to save for retirement, open up a taxable account and invest there. (4) If you STILL want more retirement savings, go back and fill up your 401k. I think you are skipping steps #2 and #3 and that may very well harm you financially in the long run.
 
Nov 7, 2000
16,404
3
81
Originally posted by: dullard
Vesting was invented for two main reasons: (1) Companies are cheap and want to spend as little as possible, (2) companies want to give people an incentive to work longer at that company.

Thus, in your case, you don't get paid retirement benefits if you haven't worked there very long (company is cheap). And you have an incentive to stick around (if you work 6+ months, then you get retirement benefits).

What you want to do is to circumvent all the work the company did. You want to get back all the money that you missed because you weren't there long enough. Think about it, if every new person did that, then they would violate the two statements above. (1) They would have to fork over a lot of money and (2) people could stick around for just 6 months, collect a massive 401K match and then quit.

So, for those reasons, matches are almost always done per paycheck. If you work at a generous/kind company or if you work at a stupid company or if you work at a small company you can probably convince someone to do what you want. If not, you are probably out of luck.

Also, there are many reasons that you DON'T want to max your account out at the beginning of the year (as mentioned above, look up dollar-cost-averaging). And, you don't ever want to miss contributing on a paycheck. Finally, since 401Ks tend to have massive fees, you often don't want to contribute any more to it than you have to (up to where you get the full company match). (1) Contribute to your 401k up to the full match. (2) Open up a seperate retirement account with lower fees, fill that up as much as possible. (3) If you still want to save for retirement, open up a taxable account and invest there. (4) If you STILL want more retirement savings, go back and fill up your 401k. I think you are skipping steps #2 and #3 and that may very well harm you financially in the long run.
Thanks for your input Dullard.

Questions...
How can I compare the fees between my companies 401K and the fees from a separate retirement account (option 2)?

Are you advising investing in a fully taxable account (option 3) instead of in the tax-benefitted 401K (after putting in the match amount)? This is the first time I have heard of that...

What options are there for #2? I am no longer eligible to contribute to my Roth IRA. Can I have a traditional IRA in addition to 401K? I am least knowledgeable about my options under #2...

I wanted to put in as much as possible into my 401K as it is Roth and I am pretty young (many years for the growth to compound).
 

dullard

Elite Member
May 21, 2001
22,855
1,086
126
Originally posted by: HardcoreRobot
Thanks for your input Dullard.

Questions...
How can I compare the fees between my companies 401K and the fees from a separate retirement account (option 2)?

Are you advising investing in a fully taxable account (option 3) instead of in the tax-benefitted 401K (after putting in the match amount)? This is the first time I have heard of that...

What options are there for #2? I am no longer eligible to contribute to my Roth IRA. Can I have a traditional IRA in addition to 401K? I am least knowledgeable about my options under #2...

I wanted to put in as much as possible into my 401K as it is Roth and I am pretty young (many years for the growth to compound).
You are welcome. I've done well not to post on Anandtech in the last few months, but this thread caught my eye.

Comparing fees is tricky (nearly impossible to truely get a grip on them). There are up front fees (often a percent of what you contribute goes into the broker's pocket and you never get back), cashing out fees (often if you cash out too soon), yearly fees (such as a fee just to have an account with the company), management fees (hidden in the fund price), etc. But, you can get most of that information if you try hard enough.

The biggest killer for 401Ks for fees is the purchasing fee. If you work for a big company, good for you, that fee is minimal or non-existant. If you work for a small company, I've seen the purchasing fee be as high as 4.75% (who knows it probably can go higher). In that case, right off the bat you are 4.75% in the hole. Whereas if you opened up a seperate retirement account on your own, you can avoid that fee.

The second biggest killer for 401Ks is the lack of choices. Sometimes you can get lots of choices, sometimes your plan stifles you. My first employer matched plan gave me abour 20 choices in which to invest. None of which were good small cap mutal funds. You know, those funds that have done fabulously in the last decade when large caps were stagnant. Also, good luck picking and chosing individual stocks and/or some other diversified investment options.

For those two reasons, you often want to max the 401Ks last.

Why did I mention a seperate taxable account? Lots of freedom, lots of choices, low fees if you want, etc. Plus, the benefits of tax deferral are far smaller than most people think (even most experts). Lets do an example. Suppose you had $1000 to invest. Suppose you are in the 33% tax bracket (25% federal + 8% state). Suppose the stock you wanted will go up 100 times from now until you cash it. Suppose taxes never change.

Tax-deferred plan: pay no tax now, invest the full $1000. When you do cash out, it has grown to $100,000. Now you pay income tax (33% = $33,000). Net to you: $67,000.

Taxable plan: pay 33% tax now ($330), invest the rest, $670. When you do cash out, it has grown 100 times to $67,000. You already paid income tax, so you don't pay it again. Does that $67,000 number seem familiar? The tax-deferred status isn't as good as people make it out to be. Note: there is a catch. You do pay long-term capital gains tax (currently 10%). So, in the end, you pay $6633 in captial gains tax, resulting in a net of $60,367 to you. The tax-deffered case is a bit better.

However, what if income taxes change? What if the baby boomers retire and we need massive tax hikes to pay for them? What if democrats (or future republicans) raise tax? What if you realize that we are historically low tax rates and they eventually go back to sustainable tax rates. Lets think about that. In the taxable plan, you still end up with $60,367 since you locked in your current low tax rate. Note: this scenario is even better if you only worked half a year this year at a low salary and are in a much lower tax bracket. But what about the tax-deffered plan? That $100,000 is now taxed at say 45% (historically and internationally reasonable tax rates): you end up with a net of $55,000. The taxable plan is better in this case.

Unless you have a crystal ball and can tell me what the tax rate will be when you retire, you can't say the tax-deffered plan is better. If you can't tell which one is better, you better have both (diversify, don't put all your eggs in one basket).
 

Orsorum

Lifer
Dec 26, 2001
27,626
3
81
Dullard - I'm a huge fan of my Roth 401(k) and my Roth IRA for the reasons you mention. :) Otherwise, fantastic summary.
 

Elbryn

Golden Member
Sep 30, 2000
1,213
0
0
Originally posted by: dullard
Why did I mention a seperate taxable account? Lots of freedom, lots of choices, low fees if you want, etc. Plus, the benefits of tax deferral are far smaller than most people think (even most experts). Lets do an example. Suppose you had $1000 to invest. Suppose you are in the 33% tax bracket (25% federal + 8% state). Suppose the stock you wanted will go up 100 times from now until you cash it. Suppose taxes never change.

Tax-deferred plan: pay no tax now, invest the full $1000. When you do cash out, it has grown to $100,000. Now you pay income tax (33% = $33,000). Net to you: $67,000.

Taxable plan: pay 33% tax now ($330), invest the rest, $670. When you do cash out, it has grown 100 times to $67,000. You already paid income tax, so you don't pay it again. Does that $67,000 number seem familiar? The tax-deferred status isn't as good as people make it out to be. Note: there is a catch. You do pay long-term capital gains tax (currently 10%). So, in the end, you pay $6633 in captial gains tax, resulting in a net of $60,367 to you. The tax-deffered case is a bit better.

However, what if income taxes change? What if the baby boomers retire and we need massive tax hikes to pay for them? What if democrats (or future republicans) raise tax? What if you realize that we are historically low tax rates and they eventually go back to sustainable tax rates. Lets think about that. In the taxable plan, you still end up with $60,367 since you locked in your current low tax rate. Note: this scenario is even better if you only worked half a year this year at a low salary and are in a much lower tax bracket. But what about the tax-deffered plan? That $100,000 is now taxed at say 45% (historically and internationally reasonable tax rates): you end up with a net of $55,000. The taxable plan is better in this case.
arent you missing the capital gains tax here on a taxable account? unless you mean a roth ira in which case the point makes sense. however in a normal taxable account you have several disadvantages. 1) income tax on distributions 2) capital gains taxes when you reallocate 3) if income taxes rise in the future, its likely that capital gains taxes will also. 4) there's a one time coversion in 2010 that allows you to convert a traditional ira into a roth ira, subject to the normal conversion taxes, which could bump you into a higher tax bracket. if you're already at 33% though, then probably not. i'm not certain of the process but it exists.

Unless you have a crystal ball and can tell me what the tax rate will be when you retire, you can't say the tax-deffered plan is better. If you can't tell which one is better, you better have both (diversify, don't put all your eggs in one basket).
i very much agree on the last statement. the best option is to have options later on. that way you can game the system to withdraw from the tax deferred side up to a certain tax bracket then pull the rest you need from your taxable side and minimize the tax hits. i guess the only other comment i have is to not let some confusion prevent you from saving now if you can. it's far better to have too much money in a 401k than get caught up in which choice to make and not put any away at all.
 

ASK THE COMMUNITY