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March 01, 2011

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Anyone with a match should read this. :)
I know some people who like to front load their contributions to their 401k just in case they leave their jobs but if you have a match, it just is not worth it.

Good reminder. My company actually gives us an option to select a "maximize" amount which will spread your limit ($16,500, in my case) over our 24 pay periods to ensure that you get the maximum company match on your pre-tax contribution throughout the year. So it basically sets your contribution limit to your fractional percentage of $687.50 is ($16,500/24) for each of one's pay checks.

I much prefer the dollar cost averaging theory anyway, so I always contribute all year long. Yes the market could jump that year, but it could also tank.

Disagree, any company that I've seen with matching programs is doing the matching based on the contributions, so he should get the full match regardless of lump sum vs. dollar cost averaging.

However, I would agree if there is a company that actually matches in that fashion.

@Josh, all the companies I know match up to a certain percentage per paycheck, like my company matches 100% up to 6% per paycheck...that means if I contribute all of my annual contributions at once, I'll miss out on everything over 6% of that specific paycheck. Your company doesn't do that?

Disagree.

It may depend on the company. I've worked for two companies with 401k matching. First of all, they both matched on base salary AND annual bonuses. I don't know if that's the exception or the rule.

Second: the match was based on *annual* contributions. Therefore, even allowing for no match on the bonus, the following scenario is possible:

Scenario #4: He wants to put all of the money in upfront but wants to ensure maximum match. So he contributes $14,575 in January (he can pay for it through a bonus he received) and $1,925 in December. The results:

* Worker contributes $16,500
* Company matches $2,100 ($175 in January and $1,925 in December)
* Total in 401k for the year: $18,600

This, basically, worked for me my first year at one company. I was hired in February, but couldn't "join" the 401(k) until September, due to a six-month waiting period. So from Sept-Dec, I contributed 3X the match level. My match for the year ended up being on my full 11 months of salary. I suspect that if I had contributed 11X the match level in my September paycheck and nothing in Oct-Dec, the company would have put in 8X in September, and then 1X each month following (even though I had no contributions those months). None of this was clearly spelled out in the Summary Plan Description.

Wrong.

As Rick points out, matching is based on *annual* contributions and *annual* salary. In scenarios #1 and #2, the employer should be either making the matching contributions paycheck-by-paycheck on the contributions already made, or should make a lump-sum match around the end of the year.

We've never thought to run the numbers that way, just always contributed monthly. So I guess by default, we agree.


This isn't right...

The % match is the same, regardless of whether you do it at the first of the year or throughout the year. As a simplified example:

6% of 100k is 6,000.
6% of 8,333 is 500 x 12 = 6,000.

If your company matches on a percentage basis, it doesn't matter when you contribute.

Wow! This post just saved me some money. Every year, I put my 401k contribution percentage at an amount that basically maxes out the 16,500 limit around mid-November, so I enjoy a little extra take-home "bonus" for my paychecks at the end of the year. But, sure enough, I was missing out on the 3% match my company does over those final paychecks. I'm going to adjust my contribution level ASAP!

I agree based on the assumption that the matching % is based on income during that pay period. That's the key, making sure how that match is calculated. It seems like there's some different views on that particular aspect here in the comments. It's an intesting question, how that assumption is generally handled.

Once the match calculation methodology is confirmed, then a more informed choice can be made. But based on how you set up this scenario, FMF, I agree.


You guys are being duped here. If I understand the definition of "match" to mean the company is matching what you put in, then how is there a difference in a 100% (or 50%) match of 16,500 at the first of the year and a 100% (or 50%) match throughout the year? It's the exact same amount of money regardless.

Chris --

For those of you wondering about the math, it appears that here's the thing that makes the difference:

*In scenario #2, he earns 3% of the salary contributed in those months ($16,500 * 3% = $495). FYI, my original number was too HIGH!

*In scenario #3, he earns 3% of the salary contributed over the year ($70,000 * 3% = $2,100).

For those of you doubting that this is an issue, most of the companies I've worked for handle their matches on a monthly basis, not annual basis (though there is an annual max you can put in).

I think it depends on your company plan and the way they calculate.

At my company i can only set the max to 20% of a paycheck to put in 401k.

They match 80% of the first 4% i put in. So i put in 4% they give me another 3.2% of my earnings.

My company only matches per paycheck so you need to spread out your payments to get the maximum match (5%). Other companies, like Rick says above, match on the actual contribution so the timeframe doesn't matter.

@FMF, I agree, it is an issue for every company I've worked for. It's on a paycheck basis (not monthly necessarily). I'm just now starting to go to the Max contribution, so I haven't had to worry about it until now. It really is annoying as we usually get two variable bonuses a year and so I'll never know when I'll MAX out or not and I want to make sure I don't max out until my last paycheck so I'll get the matching on every paycheck.

Our 401k, the employees are only matched on their pay they defer. So, if they max out early in the year, then they loose the benefit of any remaining match.

ALL THINGS BEING EQUAL, under our plan, an employee is better off deferring throughout the entire year and not front loading or postponing until later in the year the deferral.

@FMF, you should have stuck with your original math on Scenario #2. Look at it again, I'm sure you'll see your mistake.

@Chris, I don't think anyone's being duped. It appears that the two companies I worked for may be in the minority in matching contributions on an annual basis.

A lot of companies have their 401(k) plans on the internet. Just search for "401(k) Summary Plan Description". Of the seven I looked at that match contributions, six of them explicitly match on a per-pay-period basis -- supporting what FMF and most of the commenters said. The seventh one was worded similarly to my current employer's plan -- which, as I said, is somewhat vague on this subject. For instance, nowhere in my employer's SPD does it specify *when* the company match will be added to the account.

Rick --

I hate it when I do that. Why do I second-guess myself? ;-)

The amount should be 3% of his SALARY (which is $17,500), not 3% of the max he can contribute ($16,500). I changed it back.

I agree with Chris. I think the original poster hasn't been accurate in defining what his own company is matching. It just doesn't make sense. It think he's confusing salary match, with variable match, and in some cases where the extra match is in lieu of reduced pension benefits, the "safe harbor" match.

You cannot contribute more than $16500 of before-tax, REGULAR salary income in any one year, unless you are over age 50. That's the law, and there's no way around it. The only time that changes during the year, is the month you get your raise, going forward. The company matches a percentage of your regular salary each month and doesn't matter if you save more earlier in the year versus later. You are still limited to $16500 of personal before-tax contributions to a 401k in 2011. There are also restrictions on "highly compensated" employees that can actually lower the $16500 ceiling and/or limit the variable match.

The company match is different that the variable compensation match. My company matches 100% of the first 6% of personal salary contributions. For example, $70,000 salary = $4200 company matching contribution. Again, the amount goes up in the months going forward from my raise. Additionally, my company matches 3% of TOTAL compensation on a MONTHLY basis. That includes 3% of bonuses paid in February, overtime, shift differentials, and accomplishment awards. That's the ONLY time company matching contributions are variable on a MONTHLY basis.

I should have clarified that my company's 3% variable match includes monthly salary, for a total of 9% each month. Also, in my case, it doesn't matter if I suspend contributions anytime during the year. The company will look at my TOTAL earning on December 31, and fully match 9% of that amount in my last pay period. I realize a lot of other companies don't do this.

"Everyday Tips" makes a good point about dollar-cost averaging month after month, rather than trying to time the market with the bulk of one's annual contributions.

My company matches as FMF describes it in his example. (Seriously, how can people claim that ALL companies do it some other way?) I've discussed it with our Retirement Plans folks in HR.

That said, if I max out my contribution early, my company will give me what's known as a 'True Up', which fixes everything to give me the maximum matching. The true up happens in March or April of the following year, provided I'm still employed.

My company gives me 100% matching on the first 6%, so what I typically do is:

1) Front-load my contributions early in the year.

2) Calculate a pay period after which a change to 6% will get me jst over the maximum in my final paycheck of the year.

3) Change my witholding to 6% as of that pay period

4) Change back to the larger witholding value after Jan 1.

5) Receive a small 'true up' contribution in March that gets me up to 6% for the final paycheck.

As an extra, I also see a take-home 'bonus' after I drop my contribution to 6% similar to the one Evan talks about, it's just smaller than the one he sees, as a percentage of my salary.

Anyone worried about this should check to see if their company has a 'true-up' policy when they're making their plans on how to maximize their 401k benefit.

I did this last year. Decided to put the money in fast at the start of the year. I had Fidelity take out 70% each paycheck. Then when I got close to $22000 (allowed for my age) I called Fidelity and my company HR dept. to make sure they didn't take more than the allowed 22k. To my surprise HR folks were not happy I had done this. The 3% match would only be put in on a per pay period basis they said. This is because if I should quit the company before the end of the year they would not want to match the full amount. After some phone calls to several people they said they would give me the full match for the year, but I wouldn't get the match for the pay periods that I wasn't contibuting to until the end of the year. So, in the end..no big deal. I get the full match, but they ask that I spread the amount taken out over the whole year next year. I didn't think this was a problem when I did it, But I will abide by their wishes and spread my take out evenly for 2011.

As so many people have already commented, it depends on how your company matches. Mine pays in February, based on the previous year's contribution. If I quit before Feb of that next year, I get no match at all.

I max out early in the year, but it is irrelevant.
If I earn $200,000 during the year they kick in 3% ($6000) even though I contributed $16500.

The rule is: Read the fine print. Different companies do different things and the only way to maximize your benefits is to know them in detail.

I try to load up at the beginning of the year and decrease my contribution after the first 3 months.

(They don't like to, but) My workplace allows you to make a complete one time $16500 contribution and get the match. It requires one to pay them first and then they send the funds to the plan provider.

Also don't forget about the even-up contribution when they close the books. Companies understand that different contribution strategies may show up unfair on the books. Every company I've worked for that has a match makes sure they've contributed their agreed upon share. Take a look at how your plan is outlined, many are worded so that this even-up is obligated even if you've never heard of your company doing it before.

If they say 3% of salary, with no stipulations, they are obligated to contribute that money at some point. Unfortunately, that means you might not be working for the company at the determined time of the even-up.

How about a fourth Scenario based on the numbers above.

Scenario #4:
He wants to put money in upfront (in January) and he can pay for it through a bonus he received, and contribute 3% to get his match through the rest of the year.
The results:
• Worker contributes $14,575 in January).
• Company matches $175 (3% of his salary for January).
• Worker contributes $175 per month for the other 11 months a total of $1,925.
• The company matches $175 per month for the other 11 months a total of $1,925.
• Total employee contribution $16,500
• Total company contribution $2,100
• Total in 401k for the year: $18,600

This would get the majority of the money in your 401k up front so that time, being one of the biggest factors for growing your wealth, is on your side and still
give you the benefit of receiving the full company match.

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