The Experts

Ask the Expert

By: Ted Benna Creator of the first 401(k) plan

This Week, Ted Tackles:
Will I make more from the employer match if I stretch my 401(k) contributions out over the year or finish them in June? ı My statement shows that my funds are purchased at a price higher than the value listed on the exchange. Why is that? ı Am I entitled to formal notice if my employer suspends or eliminates matching contributions to my 401(k)? ı My salary exceeds the highly compensated employee limit. How does this affect my 401(k) contributions?

Q: My employer matches my 401(k) contribution at 50 cents for every dollar I contribute, up to 6.5 percent of my earnings. Would I make more from the employer match by stretching my $12,000 contribution over 12 months or if I contribute twice as much for the first six months of the year, reaching $12,000 by June and then stopping?

TB: The answer depends upon how your employer determines the matching contribution. Many employers match only during pay periods when employees actually make contributions. In that case, contributing more than the maximum percentage that is matched will result in lost employer contributions if you have to stop making contributions for the last portion of the year because you hit the dollar limit in June. You will miss the match on the applicable percent of pay you earn after this point.

Some employers compute the match on an annual basis so that the full match is contributed regardless of when the employee contributions are made, as long as the full percentage that is eligible for matching is contributed by year-end. This is much more difficult to do, which is why many employers only match per pay period.

You should check to see which method your employer uses and make your contributions accordingly.

Q: I own a bond fund, Evergreen Core Bonds/I, in my 401(k). My statement shows that my units are being purchased at a price higher than the value listed on the exchange. Why would that be?

TB: One possibility is that you may be looking at the price for a different share class of this fund. Many funds offer different share classes for the same fund. It is possible that the net asset value (price) is different for each share class. If you were looking in the newspaper at the price of a share class different from the one you own, that could help explain the difference.

The fund name listed on your statement should indicate the class of share you own. In the example you provided, the slash followed by the "I" after the fund name shows that you own institutional shares. That should be a tip-off that this fund has multiple share classes.

If this is not the reason for the price discrepancy, then you should ask the person at your company who oversees the plan or someone from the 401(k) provider for an explanation.

Q: Am I entitled to formal notice if my employer suspends or eliminates matching contributions to my 401(k)?

TB: There isn't any specific legal requirement to do so if the plan document provides for discretionary matching contributions. The plan document describes the terms of the plan and its legal obligations.

If the document requires the employer to contribute a specific amount, then, in order to eliminate or reduce the match, the employer must amend the plan. This would require the employer to distribute to all participants a notice of a material modification of the summary plan description explaining the change.

Regardless, there are also non-legal issues, such as maintaining employee morale, to be considered. I always tell an employer to inform participants in advance when the matching contribution is changed, because this is the right thing to do.

Q: What does the highly compensated employee threshold have to do with maximum allowable 401(k) contribution? Right now, my annual salary is greater than the $90,000 highly compensated employee limit. How does this affect me? Can I still contribute the full $12,000 this year? Will my contributions be limited to the average employee participation?

TB: The laws governing 401(k) plans tie the amount that highly paid employees (HCEs) may contribute to the plan to the average percentage of pay that eligible non-HCEs contribute. In most instances, the HCEs can contribute the average non-HCE percentage plus an additional two percentage points. For example, if the average contribution percentage for non-HCEs is 4 percent, the average contribution for the HCEs can't exceed 6 percent.

The average contribution percentage for non-HCEs commonly ranges between 4 percent and 6 percent, but that can vary widely from employer to employer. I have seen some non-HCE percentages below 2 percent and others above 10 percent.

Most employers base the HCE contribution limits for the current year on the non-HCE contributions made to the plan for the previous year.

That's why most employers tell the HCEs at the beginning of each year how much they can contribute. You should check with your employer if it hasn't told you.

Ted Benna, creator of the first 401(k) retirement savings plan, answers intriguing questions twice a month. With over 40 years of experience as an employee benefits consultant, Ted is a nationally recognized expert on benefits issues. He has authored three books, Helping Employees Achieve Retirement Income Security, Escaping the Coming Retirement Crisis, and Tips for Successfully Managing Your 401(k), and is President of the 401(k) Association. Ted is a frequent speaker at meetings of 401(k) plan sponsors and participants. His articles and comments have appeared in numerous publications, including The New York Times and The Wall Street Journal.

Ted's Table Archives

The information provided here is intended to help you understand the general issue and does not constitute any tax, investment or legal advice. Consult your financial, tax or legal advisor regarding your own unique situation and your company's benefits representative for rules specific to your plan.