Author Topic: 401k Terms Suck...Next Steps?  (Read 1676 times)

haflander

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401k Terms Suck...Next Steps?
« on: March 05, 2019, 10:01:47 AM »
2/18. Started new job for much higher salary than I've ever had before. Paperwork states 401k is through Principal Financial Group, starts after 1 full year of employment (boo), 3% match (meh), automatic vesting (woo!).

I just now get the full paperwork and terms. Email from HR person states employee contribution is limited to 15% max of salary. Also, the 3% match is provided at year end. Interestingly, she states these in bullets in the email text, *but I do not see them anywhere in the 401k enrollment paperwork.*

I'm pretty upset about those terms. First of all, I had to wait a year to even be eligible. Initial new hire benefits and paperwork does not state anything about the 15% max and year-end match. My salary is 70k, so 15% is 10,500 and well below the federal 19k max. Additionally, because the match is not made with every paycheck, I'm losing out on growth and dividends and interest for the whole calendar year. I've never even heard of the match being done this way, I thought it was always done with every paycheck. Instead, I feel that it's just a year-end bonus directly into the 401k. Another crappy point is that if I'm thinking of leaving in the latter half of the year (espy the last quarter), I'll be tempted to stay around for the 3% match. I just now find out about these and I feel like all of it is just shady terms saving the company $. I did call Principal just to gain some more info and they basically confirmed my understanding of the above terms. The paperwork I have lists out fund options, I'm guessing the most appropriate of which are a balanced retirement date option (2055?), a large cap S&P 500 index, and a mid cap S&P 400 index. Fees are not listed in the paperwork I have, so I guess I'll have to call Principal again...super annoyed about that also. Why aren't fees clearly stated??

So for now I'm trying to wrap my head around everything and get advice here before taking next steps. Investment order would be 3% (2100) to get the match, then traditional IRA maxed at 6k, then I'm not sure what. Do the crappy terms of my specific work 401k change the investment order for me by any chance...? I'm trying to understand all of my options available here, as well as finding the one that's most financially advantageous.

Questions...
1. Has anyone had similar crappy terms such as salary % limits and year-end match? What did you do?
2. I guess my only option in terms of getting more favorable terms is to complain to management? I don't want to be viewed as That Guy or a constant complainer. Maybe recruit a few other like-minded people to join me, the more people agreeing with me, the better? How exactly would I have this conversation with management? "Hey, our 401k sucks, I want more $." Not sure how to say that in a diplomatic way.
3. Most importantly, what should I do right now with my 401k? Other options? IRA? I have never had an IRA so would like some specific instructions on how to go about doing this.

Other info: I have zero debt. I have a fully funded and very healthy EF/FU fund. I have two old 401k accounts. My plan was to figure out my current 401k situation before rolling over old 401k accounts to a new account. I am living in sin with my gf, so expenses are low, which is why I'm trying to max out savings. I've never been in this position before so my goal is to start now with seriously building my stache. I've never had any taxable account or Vanguard account but certainly open to starting now. Before now I've been focused on eliminating debt and funding the EF/FU, but have fully finished killing and building those.
ETA: No HSA option. I'm not sure why, but I guess my health insurance isn't technically a HDHP.
« Last Edit: March 05, 2019, 10:10:41 AM by haflander »

MDM

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Re: 401k Terms Suck...Next Steps?
« Reply #1 on: March 05, 2019, 12:24:54 PM »
Questions...
1. Has anyone had similar crappy terms such as salary % limits and year-end match? What did you do?
2. I guess my only option in terms of getting more favorable terms is to complain to management? I don't want to be viewed as That Guy or a constant complainer. Maybe recruit a few other like-minded people to join me, the more people agreeing with me, the better? How exactly would I have this conversation with management? "Hey, our 401k sucks, I want more $." Not sure how to say that in a diplomatic way.
3. Most importantly, what should I do right now with my 401k? Other options? IRA? I have never had an IRA so would like some specific instructions on how to go about doing this.
1. Yes, some companies impose arbitrary percentage limits, even for non-Highly Compensated Employees.  Have not seen any good reasons for this.
2. Asking "why is it that only people making ~$127K or above can contribute the IRS-allowed $19K to our 401k plan?" seems a reasonable approach.
3. Google "start an IRA Fidelity", "start an IRA Schwab", and "start an IRA Vanguard" and go from there.

haflander

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Re: 401k Terms Suck...Next Steps?
« Reply #2 on: March 05, 2019, 02:49:29 PM »
So in terms of #s, I believe you're supporting what I stated originally, 3% to the 401k and maxing out the IRA with 6k. After that (combined 8k), I'm not sure what to do.

Another huge caveat is that I'm trying to balance retirement savings vs saving for a house DP, but that's another can of worms. I have enough to max out retirement accounts, but then would have little to nothing to save for a house. All signs point to staying in the same area for 10+ years.

PDXTabs

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Re: 401k Terms Suck...Next Steps?
« Reply #3 on: March 05, 2019, 03:04:51 PM »
2/18. Started new job for much higher salary than I've ever had before. Paperwork states 401k is through Principal Financial Group, starts after 1 full year of employment (boo), 3% match (meh), automatic vesting (woo!).

3% match at the end of the year with immediate vesting isn't bad (it's not great, but it's not horrible either). In fact, if is better than the 0% match that I get.

I do agree that the arbitrary cap and the one year waiting period are bad. The arbitrary cap serves no purpose to your employer, AFAIK. The waiting period is a double edged sword. It keeps them from having to pay a match but it also makes it harder for them to deal with their highly compensated employees.

haflander

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Re: 401k Terms Suck...Next Steps?
« Reply #4 on: March 05, 2019, 03:21:36 PM »
I agree. The customer service lady at Principal told me that some companies have that salary % cap to protect the company from highly compensated employees paying over the federal limit. But...who cares? That would be the employee's fault, not the company's. I imagined that financial companies would have tech in place that simply cuts you off when you hit 19k anyway, to protect themselves.

As MDM calculated, you'd have to be paid 127k to contribute 19k in accordance with the 15% cap. I don't really understand why this limit is a Thing, because there are only a few VP level (incl some commissioned salesmen) people at my company who would be paid that much...<5 out of ~30 total people. I doubt anyone has raised concerns such as these, it takes a Mustachian or similar nerd to really look into the details and question the limits that are in place.

MDM

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Re: 401k Terms Suck...Next Steps?
« Reply #5 on: March 05, 2019, 03:24:02 PM »
So in terms of #s, I believe you're supporting what I stated originally, 3% to the 401k and maxing out the IRA with 6k. After that (combined 8k), I'm not sure what to do.
You mentioned the Investment Order post.  What does that suggest for you?

haflander

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Re: 401k Terms Suck...Next Steps?
« Reply #6 on: March 05, 2019, 03:43:41 PM »
I suspect I'll always be in the 22% bracket, so that would suggest tIRA for the 6k. I don't believe I could manipulate things to get me down to the 12% bracket unless there's a big decrease in my salary at some point. I'm not sure how getting married would affect this in future years? Also, I generally believe the country will accept things such as a single-payer system and possibly other left-leaning policies over my lifetime, thereby increasing tax % significantly. Again, not sure whether that should affect my tIRA vs Roth choice at this time.

Other than that, I'm not sure how the fees would compare. Now, I'm talking about what to do with any $ over 8k (Investment Order #5). I'm not sure what Vanguard IRA fees are like (especially when starting with zero) and don't have fee #s for my 401k fund options yet.

Another thing to consider is that I'm a big fan of simplicity; I'd like to have the least accounts possible. Obviously, that's not more important to me than taking advantage of all available $ opportunities.

I've learned about these generally in my time here but it's my first foray into taking real action with retirement funds. I appreciate the help and apologize for the annoying hand-holding.

mies

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Re: 401k Terms Suck...Next Steps?
« Reply #7 on: March 05, 2019, 04:44:53 PM »
You got a pretty raw deal with your 401k. If you are looking to minimize fees, I have a feeling the S&P 500 fund will probably be your best best bet. My company used to use Principal for its 401k before switching to Vanguard. Principal's S&P 500 fund had the lowest fees of all the choices. It was 0.31% a couple of years ago. The expense ratio might be higher too. It looks like Principal offers several iterations or share classes of their S&P 500 fund.

I would harass your HR people about the arbitrary cap. The squeaky wheel gets the grease :)

MDM

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Re: 401k Terms Suck...Next Steps?
« Reply #8 on: March 05, 2019, 06:47:23 PM »
I suspect I'll always be in the 22% bracket, so that would suggest tIRA for the 6k. I don't believe I could manipulate things to get me down to the 12% bracket unless there's a big decrease in my salary at some point. I'm not sure how getting married would affect this in future years? Also, I generally believe the country will accept things such as a single-payer system and possibly other left-leaning policies over my lifetime, thereby increasing tax % significantly. Again, not sure whether that should affect my tIRA vs Roth choice at this time.
The marriage effect would depend on how much income your spouse brings to the partnership.

If you really believe your marginal rate will be higher at withdrawal, then the logical consequence of that assumption is to use Roth now.  Just note that the more one contributes to either traditional or Roth, the more likely that will be the wrong strategy. ;)

Quote
Other than that, I'm not sure how the fees would compare. Now, I'm talking about what to do with any $ over 8k (Investment Order #5). I'm not sure what Vanguard IRA fees are like (especially when starting with zero) and don't have fee #s for my 401k fund options yet.

Another thing to consider is that I'm a big fan of simplicity; I'd like to have the least accounts possible. Obviously, that's not more important to me than taking advantage of all available $ opportunities.

I've learned about these generally in my time here but it's my first foray into taking real action with retirement funds. I appreciate the help and apologize for the annoying hand-holding.
Fees at Vanguard (or Fidelity or Schwab) will be very low if you choose correctly.  E.g., see Three-fund portfolio - Bogleheads.

haflander

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Re: 401k Terms Suck...Next Steps?
« Reply #9 on: March 06, 2019, 12:26:22 PM »
Thanks. After more research, I believe it would make sense for me to roll over my two old 401k accounts into a personal Vanguard tIRA account. The total between the two is somewhere between 10 and 15k, so I wouldn't be restricted by minimum amounts associated with each fund. I know about the three fund portfolio and agree with it generally, but would want to stay to two funds and avoid bonds until I'm close to retirement. VTSAX and VTIAX are more than fine for me, thinking something around 80/20.

These are my understandings about the process and tax implications...please correct me if I'm wrong. Yes, I know these are noob ?s.

1. I'd contribute money to a Vanguard tIRA after it's been taxed, maybe set up auto contributions from my paycheck. However, it would still be considered a tIRA (NOT Roth) as long as I do #2?
2. If I contribute 6k a year, then I deduct that from my income for that year at tax time. Then, distributions would be taxed accordingly during retirement.

I'm a little confused about why tIRA contributions are ever taxed in the first place, that probably just shows my ignorance. I thought tIRA contributions were made before they're taxed. Are they only pretax if they're deducted automatically from your paycheck? The whole "tax it, then deduct it from your taxes, then it's taxed again upon distribution" process doesn't really make sense to me, which makes me wonder if I'm misunderstanding.

MDM

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Re: 401k Terms Suck...Next Steps?
« Reply #10 on: March 06, 2019, 12:55:56 PM »
The whole "tax it, then deduct it from your taxes...".
You may be mistaking withholding for actual taxation.

When you deduct a tIRA contribution on form 1040, it means that amount of your income is not subject to income tax at all that year.  IRA and 401k accounts are not tax free, only tax deferred, so yes you pay tax when withdrawing.

If the tax rate you pay when withdrawing is less than the rate you saved by contributing, traditional was a good choice.

If the tax rate you pay when withdrawing is greater than the rate you saved by contributing, Roth would have been a better choice.

Does that make sense?

haflander

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Re: 401k Terms Suck...Next Steps?
« Reply #11 on: March 06, 2019, 01:11:11 PM »
Thanks. After more research, I believe it would make sense for me to roll over my two old 401k accounts into a personal Vanguard tIRA account. The total between the two is somewhere between 10 and 15k, so I wouldn't be restricted by minimum amounts associated with each fund. I know about the three fund portfolio and agree with it generally, but would want to stay to two funds and avoid bonds until I'm close to retirement. VTSAX and VTIAX are more than fine for me, thinking something around 80/20.

MDM, yeah, I guess. I think I've been misunderstanding the mechanics of a personal tIRA...I thought it came out of your check pretax, just like a work 401k. Anyway, that's not important.

Do you or anyone else have thoughts on the above? Any particular points of contention or is it a sound plan?

Next steps are to call Principal again for fund ER info. I don't think that will change anything about what I'll do, but I just want to know anyway. Then start the rollover process, first by opening a Vanguard tIRA account. I assume that will be a long process before the old 401k $ is actually there and fully under my control.

MDM

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Re: 401k Terms Suck...Next Steps?
« Reply #12 on: March 06, 2019, 01:48:25 PM »
Do you or anyone else have thoughts on the above? Any particular points of contention or is it a sound plan?
The main caveat is if you might want to use the Backdoor Roth process.  If so, keep pre-tax money out of tIRAs and in 401ks.  If not, having pre-tax money in tIRAs is fine.

haflander

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Re: 401k Terms Suck...Next Steps?
« Reply #13 on: March 06, 2019, 02:30:37 PM »
Thanks. If I want to do more than 6k in the tIRA, what then? Do I need to keep it in separate accounts within Vanguard for tax purposes? Or does it stay in one account, but I can only deduct 6k from my income at tax time? Or is it just easier (or the only option I have) to put additional $ in the 401k at that point?

Another concern I found that I didn't previously know about, "deductible IRA income limit." With a 70k salary, I'm over the 64k limit for 2019, so I can't take the full 6k deduction? Should I be concerned about this or does it change what I should do?

MDM

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Re: 401k Terms Suck...Next Steps?
« Reply #14 on: March 06, 2019, 02:41:51 PM »
Thanks. If I want to do more than 6k in the tIRA, what then?
Wait 'til next year.  The $6K is an annual limit.

Quote
Another concern I found that I didn't previously know about, "deductible IRA income limit." With a 70k salary, I'm over the 64k limit for 2019, so I can't take the full 6k deduction? Should I be concerned about this or does it change what I should do?
What is your MAGI for traditional IRA purposes? See https://www.irs.gov/publications/p590a#en_US_2018_publink1000230489.

dandarc

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Re: 401k Terms Suck...Next Steps?
« Reply #15 on: March 06, 2019, 02:49:06 PM »
6K is the limit for IRAs for the 2019 tax year. You can't put more in to your tIRA than that. Any broker worth its salt will make it very difficult if not impossible to do that. Even if you do manage to do this by having accounts at different brokerages, that is something you want to correct ASAP - the penalty tax is 6% per year on excess contributions until you correct the problem.

There are 2 simple ways to deal with the 64K limit on the tIRA.

1) Just don't sign up for the 401K - if you don't participate at all, meaning nothing is added to your 401K account at all for the whole year, then your tIRA contribution is always deductible. Of course, doing that, you're leaving free money on the table by foregoing the match, so it is probably smarter to:

2) Reduce your mAGI so that you're under this particular limit. Contribute $6K to your traditional 401K and you're there. Your employer withheld health insurance premiums, dental, vision also reduce your income for this purpose. HSA and FSA contributions do as well if you do any of those. At $70K gross, it is not hard to get this number below $64K if you plan ahead.

haflander

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Re: 401k Terms Suck...Next Steps?
« Reply #16 on: March 06, 2019, 03:50:52 PM »
Thanks to both. I didn't know that MAGI was the basis for the 64k number. After doing some math, 4374 is taken out a year for total health insurance (mine sucks). 3% to get my 401k match would be 2100, so that would get me up to 6474 or a MAGI of 63,526 *in a normal year.* This is complicated by the fact that I haven't contributed anything to my 401k yet this year. As I understand it, I'd have to contribute 1626 to my 401k to get my MAGI under 64k. Call it 2k to be safe. However, I'm not positive about when my 401k contributions will actually begin. I still haven't made my account yet, was waiting to get this all straightened out.

I called Principal again and they basically told me nothing new. Oh, except for the disappointing timing of the employer match...It could be in January, or it could be way later in May!! Maybe I can view more details (investigate the 15% stupidity) after setting up an account. I can't view ERs or fees until then. Estimating that setting up the account will not be a fast process, I'm going to go ahead and set a 401k % contribution at the same time to get the ball rolling. If this starts the first paycheck of April, I would have to do 4% if going with a round % to get to 2100. I'll probably go with the S&P 500 index fund and reevaluate later when I can get more details. I'm paid twice a month (easier math, woo!), so 9 remaining months or 18 paychecks starting in April.
3% 87.50 * 18 = 1575
4% 116.67 * 18 = 2100

So 4% 401k contribution would keep me under the 64k MAGI limit to still get the full 6k deduction on a tIRA. That sounds like an easy #, and that way I wouldn't have to adjust anything for 2020.

Am I correct or have I missed something? Anything glaring that I haven't considered? Is my math correct? I had never heard of the MAGI limit for a tIRA, so very grateful to learn about that. May not have mattered this year, but if my earnings keep increasing at the same rate (unlikely, but maybe), it would have been problematic very quickly.

TomTX

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Re: 401k Terms Suck...Next Steps?
« Reply #17 on: March 06, 2019, 06:14:53 PM »
Thanks. If I want to do more than 6k in the tIRA, what then?
Wait 'til next year.  The $6K is an annual limit.

Except it sounds like OP didn't make a 2018 contribution yet, which they can still do until April 15th 2019 (or whatever Tax Day is this year)

So, OP can contribute $5,500 designated for 2018, plus $6,000 designated for 2019, totaling $11,500.

lowroller4111

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Re: 401k Terms Suck...Next Steps?
« Reply #18 on: March 06, 2019, 06:50:27 PM »
yes, I had $5k returned to me last year (for 2017 contributions) because our company's plan failed ADP testing. I had to pay taxes on all that as well which sucked.  The government does not make it easy for middle class people to save.  This type of testing should be reserved for millionaires not for average Joe's like me, absolutely RIDICULOUS!  Oh well.

haflander

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Re: 401k Terms Suck...Next Steps?
« Reply #19 on: March 07, 2019, 07:55:21 AM »
Except it sounds like OP didn't make a 2018 contribution yet, which they can still do until April 15th 2019 (or whatever Tax Day is this year)
So, OP can contribute $5,500 designated for 2018, plus $6,000 designated for 2019, totaling $11,500.

Interesting...I wouldn't max this, it would be most of my cash flow. I need to dig into my budget and determine how much I want to save for retirement vs house DP. So I definitely wouldn't completely max out at 11.5, but it's good to know I can go over 6k.

If I were to do this, how exactly do you designate it for 2018 for tax purposes? Just contribute to it normally and then at tax time 2020 you say it was for 2018? Or do you need to do something different or more official?

dandarc

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Re: 401k Terms Suck...Next Steps?
« Reply #20 on: March 07, 2019, 07:59:05 AM »
At Vanguard, when you make an IRA contribution you can select which tax year it is for. Most brokerages work that way.

haflander

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Re: 401k Terms Suck...Next Steps?
« Reply #21 on: March 07, 2019, 08:06:24 AM »
Understood. I've gotten some great advice here and have an actionable plan moving forward. I think all that's left for me to do is create two accounts, do all the paperwork, initiate the rollovers, and spend some time looking at the budget.

Thanks all, but please let me know if there's anything else I could be missing or should consider.

TomTX

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Re: 401k Terms Suck...Next Steps?
« Reply #22 on: March 09, 2019, 07:41:08 AM »
Except it sounds like OP didn't make a 2018 contribution yet, which they can still do until April 15th 2019 (or whatever Tax Day is this year)
So, OP can contribute $5,500 designated for 2018, plus $6,000 designated for 2019, totaling $11,500.

Interesting...I wouldn't max this, it would be most of my cash flow. I need to dig into my budget and determine how much I want to save for retirement vs house DP. So I definitely wouldn't completely max out at 11.5, but it's good to know I can go over 6k.

If I were to do this, how exactly do you designate it for 2018 for tax purposes? Just contribute to it normally and then at tax time 2020 you say it was for 2018? Or do you need to do something different or more official?

When you make your contribution at Vanguard (or wherever) you designate it as a 2018 contribution. You note it on your 2018 taxes (which you should be doing soon).

If you do any IRA contribution before tax day (up to $5,500), designate it for 2018 - that means you will have more choice later, as you can make the 2019 contribution all the way until tax day 2020.

dandarc

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Re: 401k Terms Suck...Next Steps?
« Reply #23 on: March 11, 2019, 11:53:00 AM »
When you make your contribution at Vanguard (or wherever) you designate it as a 2018 contribution. You note it on your 2018 taxes (which you should be doing soon).

If you do any IRA contribution before tax day (up to $5,500), designate it for 2018 - that means you will have more choice later, as you can make the 2019 contribution all the way until tax day 2020.
+1 to this. Once you're past the deadline, you can never make 2018 IRA contributions again. This isn't Canada.

So, if you have money to invest in an IRA or HSA where you have a choice of year, you should always send it to the earliest year you can. If you're self employed, same advice for a SEP-IRA or Individual 401K. Speaking of which - time to file my extension so I can have a little more time to make 2018 SoloK contributions.