What does this mean? (401K)

[6leakertweeker]

Good afternoon,

   So our company made a change to our 401k match and I'm not sure I fully understand it.  I am wondering if someone could dumb this down for me?

 It states as follows: "Company match is 100% of the first 2% of the employee contribution and 50% of the next 2%.  Employees that contribute 4% of pre-tax wages will receive an additional 3 % from the company's matching program."

  Would it be correct to say that their maximum allowable match would be 6%?   If so, why is it advantageous for them to structure it this way?

  Thanks in advance for any help.

[Jack]

It means they match up to 3%, but you have to put in at least 4% to get the whole thing.

your contribution	company match
0%	0%
1%	1%
2%	2%
3%	2.5%
4%	3%
5%	3%
...	...
100%	3%

[TexasRunner]

It means they match up to 3%, but you have to put in at least 4% to get the whole thing.

your contribution	company match
0%	0%
1%	1%
2%	2%
3%	2.5%
4%	3%
5%	3%
...	...
100%	3%

I'm not sure thats right...

Is it this:

your contribution	company match
0%	0%
1%	1%
2%	2%
3%	2.5%
4%	6%
5%	6%
...	...
100%	6%

[TexasRunner]

Keyword being "additional".

Either way, OP needs to ask his HR department.  If it is 6% match, congrats! Thats pretty good (IMO)!

[Frankies Girl]

Would it be correct to say that their maximum allowable match would be 6%?   
That's my take on it too. But likely am wrong.

If so, why is it advantageous for them to structure it this way?
It honestly doesn't make sense the way they have it structured, but I am not an expert.

Matches based on the employee's contribution level are mostly an incentive for the employee to save more, and a benefit in recruiting new people. It is a great benefit to attract new hires and acts as a supplementary form of compensation. And if there is a vesting schedule (and there usually is) it also acts as a retention incentive so you have less employee turnover.

The way they have theirs structured, it likely is to take advantage of all the previous, but also because so many folks rarely even enroll in their 401k, let alone fund it past 3%. So it's likely a great recruiting bonus and a savings (for the company) if most don't go over 3% contributions. They can still say they offer matching, but most folks never contribute enough to earn that full percentage.

[Jack]

Keyword being "additional".

I don't think so. I think the second sentence about the "additional 3%" is just a re-statement of the first sentence: you contribute 4% (total), we contribute an "additional" 3% (total), and the resulting overall contribution is 7% (total). It's a match in addition to the employee contribution, not a match in addition to a match.

I agree that it's a stupid, confusing way to phrase it.

[catccc]

Pretty sure Jack's got it right.  I read that as a max 3% employer contribution.  (btw, I used to write up ERISA docs as part of my job...) 

What was the prior match policy?  If 6% is significantly better than what it used to be, I'm going to guess it's not 6%.  But if it is 6%, that is sweet!  It would be unusual for an employer to match more than you put it. 

If they had some safe harbor policies in the plan, that would be different.  For instance, my employer puts in 4% of my salary as safe harbor regardless of what I contribute.  And then they match 100% of the 1st 3% I contribute.  So I put in 3%, and the employer puts in 7%.  But the match doesn't exceed my contribution, the safe harbor does.

[Mississippi Mudstache]

I'm also in agreement with Jack's interpretation. But best to contact HR for clarification, just to be sure.

[dandarc]

I read that as put in 4%, get total match of 3% like Jack did.  I'd be surprised if they really meant match 100% up to 2%, 50% up to 4%, and then add another 3% of salary if you're at or above 4%.  HR should be able to clarify.

Would be quite the incentive to at least do 4% if deferring 3.99% gets you 2.99% match but deferring 4% bumps you up to 6% match.

[6leakertweeker]

 Thank you all for the quick responses.  I appreciate that.

      Our HR lady couldn't give me a straight answer on whether it was 3% or my optimistic 6% interpretation.  Quite frankly, it doesn't seem like anyone here is real "401K savvy".   

      I'm currently at 15% and will be shooting for 25% by the end of Q1 17'.  According to my pay details it looks like they are matching 3% but I just wanted to make sure I fully understood how it worked to ensure I was getting the max benefit from the plan. 

   Once again, I really appreciate all of your folks help.  This website is a great resource!

[BlueHouse]

There's one more implication that I didn't see addressed. 

When there's language such as "match the first x%" on the match, that means that if you front-load your contributions to the point where you max out before the end of the year, you'll lose out on matching dollars.  Look for a "True-up" clause, otherwise you'll want to spread your contributions out over all the pay-periods in a year so you don't miss out on free match.

[DrF]

Naw, I think it's 'If you put in 4%, we'll match that by giving you 3%, then we'll throw an additional 3% on top of that'.
Incentive for people to put in more of their own money.

My wife's company does the same thing 'Match 50% of the first 4%, but if you contribute 4%, we'll give you a 2% lump contribution once per year'.

[6leakertweeker]

Naw, I think it's 'If you put in 4%, we'll match that by giving you 3%, then we'll throw an additional 3% on top of that'.
Incentive for people to put in more of their own money.

My wife's company does the same thing 'Match 50% of the first 4%, but if you contribute 4%, we'll give you a 2% lump contribution once per year'.

If this is the case I'm getting the shaft.  I've been at 15% for the last 12 months and have only received 3% match across the board.

[seattlecyclone]

They definitely worded it in an ambiguous manner. "Additional" could refer to bonus matching in addition to the matching they already described, or it could just be referring to matching in addition to your personal contribution, and they were merely restating what the total match would be for those who are bad at arithmetic. Your HR folks would ideally know the correct interpretation.

[6leakertweeker]

I agree.  It is worded sketchy. 

[Cathy]

The quote from the original post is likely from some form of summary plan document or perhaps even more informal guidance. Generally speaking, participants in a 401(k) plan do not need to rely on these informal sources. Upon the request of an employee, employers generally must provide the actual legal documents governing the plan, including the trust instrument or instruments. The relevant portion of the law reads as follows:

The administrator shall, upon written request of any participant or beneficiary, furnish a copy of the latest updated ... trust agreement, contract, or other instruments under which the plan is established or operated.

Employee Retirement Income Security Act of 1974, PL 93-406, § 104(b)(4), 88 Stat 829, 849, codified at 29 USC § 1024(b)(4) (emphasis added).

There are certain exceptions to this provision which I will not discuss here. In particular, but without limiting the generality of the preceding sentence, I express no view on whether this provision applies to the employer mentioned in the original post.

The trust agreement is generally written in a less ambiguous manner than other documents might be.

[Spitfire]

I agree with Jack also, 3% total, and that seems to be what you're seeing in your statements.

[ooeei]

Agree with Jack.  It just seems like they told you how they calculate it, then gave an example of the max so people wouldn't have to figure it out.  "Here's how we calculate.  Blah blah blah 50% 100%.   In summary:  If you contribute 4%, we contribute 3%."

A shocking number of people would just give up on trying to figure out the "100% of the first 2% and 50% of the next 2%" math.  They tried to make it easy, and pretty much failed.

[ZiziPB]

Request the Summary Plan Description for your 401k plan and read it. 

I personally think Jack got it right.  The language you cited is just very poorly drafted.  I would read it as:

"Company match is 100% of the first 2% of the employee contribution and 50% of the next 2%.  That means that Employees that who contribute 4% or more of pre-tax wages will receive an additional 3 % from the company's matching program in addition to their own contributions."

[ender]

Good afternoon,

   So our company made a change to our 401k match and I'm not sure I fully understand it.  I am wondering if someone could dumb this down for me?

 It states as follows: "Company match is 100% of the first 2% of the employee contribution and 50% of the next 2%.  Employees that contribute 4% of pre-tax wages will receive an additional 3 % from the company's matching program."

  Would it be correct to say that their maximum allowable match would be 6%?   

My previous employer worked like this. It reads pretty clearly to me that the way it works is the company matches your first 2% at 100% and the next 2% at 50%.

So if you contribute 4%, this results in effectively a 3% match.

If so, why is it advantageous for them to structure it this way?

One additional benefit is that it likely increases their average contribution rate. This makes it less likely the 401k plan will fail discrimination testing, which is a way to make sure that the 401k isn't just being utilized by highly compensated employees.

[Vagabond76]

OP could put 5% in and see what happens.  He'll find out really quick if he get a 3% or 6% match.  Only downside is if the plan has onerous fees or poor investment choices, or if he has high interest debt accruing.

[6leakertweeker]

Thank you all for all the replies.  Very informative.  I've noticed from the beginning that our business operates in some very unusual ways, so the way they worded this is right up their alley.

Cathy, I assume you're an attorney.  I would request that from our HR department but I'm sure I stir the pot over there enough as it is.  Which, I will do more of when our FMC overtime exemption changes take effect. :) 

 Once again, thank you all for the help!

[TexasRunner]

... Which, I will do more of when our FMC overtime exemption changes take effect. :)  ...

Ahhhh....  Thats going to be a wonderful paycheck.  :)

[6leakertweeker]

Haha, I wish.