Read the Fine Print

Richard Connor

IT’S THAT TIME of the year—when we should all reevaluate how much we’re saving in our employer’s 401(k). The 2020 contribution limit is $19,500, up $500 from 2019’s level. For those age 50 and older, the catchup contribution was also raised by $500, to $6,500, so these folks can invest as much as $26,000 in 2020.

In addition, it’s a good time to check we’re getting the most out of our 401(k). What are the rules on the employer match? Are we leaving any of that “free money” on the table? How about the plan’s investment options? Are we happy with our choices? Does the recent runup in stocks mean we need to rebalance our mix of stocks, bonds and cash investments?

If your spouse also has a 401(k), you might look at both plans in concert—as well as any other investments—and make decisions to get the best out of each plan. For instance, there were many years when my plan’s investment options were superior to those in my wife’s plan, so we skewed her contributions toward her plan’s better options and I then adjusted my holdings to round out our family’s portfolio. Some of our retirement and taxable accounts might appear stock- or bond-heavy, but at the aggregate level we’re comfortable with our allocation.

In doing your New Year’s 401(k) evaluation, be sure you understand any nuances that could cost you money. I ran into this when my employer sold my division to a private equity firm. Over the next several years, our benefits changed somewhat, but not too dramatically. There was, however, a subtle change to our 401(k) plan that took a few years to come to light and caused a lot of heartache for the employees that were affected.

The situation had to do with “super savers”—employees who save the maximum annual amount allowed in their 401(k) in less than 12 months. Our company provided a 50% match on the first 8% of compensation. The company contributed its matching amount each pay period that the employee contributed. The issue: If an employee hit the maximum contribution prior to year-end and had to stop contributing, the company would also stop contributing its match.

Let’s say an employee was under age 50, earned $240,000 a year and elected to have 25% of her salary deferred. She would have contributed the maximum $19,500 by the end of April, giving her a match of $3,200. By contrast, if she’d spread out her contributions throughout the calendar year, she would have got a match of $9,600.

To prevent this inequity, some plans have a “true-up” feature to help you get the maximum match. The employer looks at your account at year-end to determine if the average percentage you contributed would have resulted in a larger match. If so, it makes a true-up contribution.

It turns out that our old company had the true-up feature. But when we were sold and moved to a new benefits platform, the feature disappeared. This happened even though we used the same company to administer the 401(k) and the plan was virtually identical in every other respect. It took several years for an employee to notice the discrepancy. The company eventually revised the plan, but a handful of employees missed out on some of their employer match for a few years.

The moral of the story: Periodically review your accounts and make sure what you expect to happen is indeed happening. If something doesn’t make sense, check with your plan provider or your benefits department. A few minutes on the phone could save you a lot of heartache—and a lot of money.

Richard Connor is a semi-retired aerospace engineer with a keen interest in finance. Rick enjoys a wide variety of other interests, including chasing grandkids, space, sports, travel, winemaking and reading. His previous articles include Return on Investment, Decision Time and Our Charity. Follow Rick on Twitter @RConnor609.

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