For most companies, defined benefit pension plans are no longer in existence. Instead, they’ve rolled over some of that lost benefit to employees by increasing matching contributions on defined contribution plans, known mostly as 401(k) plans. Therefore, employees are learning that to retire comfortably without a pension plan benefit, they must max out their allowed 401(k) contributions – up to the IRS limit each year – to have enough saved for retirement.
In 2016, the employee 401(k) contribution limit is $18,000 per year under the age of 50, increasing to $24,000 per year for those over 50.
Sounds pretty simple, right?
However, now there’s the question of whether your clients are losing free money that isn’t making it into their 401(k) plans. Most companies offer a 401(k) matching contribution, such as a 50% match for every dollar up to a 10% contribution by the employee, based on their pay. In other words, if you put in 10%, the company will match up to 5%. If the employee contributes anything below the yearly limited contribution allowed, we don’t usually have an issue. However, if the employee maxes out their contributions before year-end, they could possibly be leaving money on the table in matching contributions.
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Example: Joe earns a $10,000/month salary, and therefore, he contributes 15% or $1,500/month to his 401(k) plan, which will max him out at $18,000 by year-end. He’ll get a 50% match on the first 10% contributed each month, equaling a $500/month company match. Therefore, each year Joe will have contributed $18,000 into his 401(k) plus the $6,000 in company match.