I Lost $1,000 By Contributing Too Much Too Soon To My 401k

I missed out on $1,000 from my company this year on the employee match. And I found out I missed out on about the same amount last year. That kind of stinks! Here’s what happened:

About three years ago I successfully contributed the maximum amount to my 401k. Hooray! That had been a goal of mine for several years and I finally hit it. And once I hit that level, I vowed to always hit that level. Last year I hit the maximum about November. This year I’ll hit the maximum on my next paycheck in about a week. I do a little happy dance when that happens and the fun thing is my paycheck gets a little better for the last month or two of the year so I can pay down some bills, spend some money for Christmas, or whatever.

So I was doing some thinking last night and checking my accounts and I noticed something. When I did the math, it didn’t come out right. My company matches up to 4% of my pay. They have a schedule, so they match 100% up to 2%, then 50% up to 6%, for a total of 4%. But when I looked at my last pay stub and the amount they have contributed this year, it was less than 4%. So I ran the numbers and I’m short on the match by about a $1,000 for the year. I did some searching on Google and found this spot on article on Forbes that explained what happened. It turns out that since I hit the maximum contribution level at the end of October, I miss out on pay period matching for November and December, which adds up to about $1,000.

I asked my benefits people about this today. I was told that my company does not have a “true up” feature and that I “can take a look at maximizing my contribution by per pay so I can take advantage of the company match.” Huh? I thought that’s what I was doing.

I pushed a little bit and my benefits people sent me the adoption agreement, which is the form they file with the IRS. They pointed me to page 15 of 52 of the document, which includes this little nugget:

There’s a couple problems with this. First, this document isn’t made available on our Intranet or through any distribution channel, so I had never seen this before. And second, this only specifies how matching contributions are calculated, but it doesn’t really explain anything and it’s very hard to understand what it means. What it means is that if you don’t contribute during a pay period, then you will not receive any matching contributions, even if you are contributing above the threshold level specified in the plan. Remember that ours is 6%. You have to contribute 6% of your pay to get the maximum match. But you must also contribute in every pay period to earn the maximum match.

I was also told that all the plan documents were on our web portal, and it was implied that I should have read this and known about it. Here’s what I found that described the matching contributions:

So the method of matching is published in the 401k documents, although I still think it is easy to miss and not understand. At first reading, it just tells me that my company will match every pay period, but it doesn’t explain that if I contribute the limit before the end of the year, I’ll miss out on matching contributions.

I believe that we should all be responsible for our own money, benefits, etc. However, I think this bit of knowledge is beyond what can reasonably be expected for an educated person to know. I admit that I don’t know everything, but I am well educated and do a lot of reading about finances and managing my own portfolio. I had never seen this before now and I’ve been in a 401k for about 7 years. I’ve never read anything about this in Money magazine (which I read cover to cover every month) or seen any reference to it online before now. When I went looking on the Internet, there were only a few articles that explained this effect. Most articles talked about making sure you contribute enough to get the match or gave advice about balancing your portfolio, watching fees, etc.

I also asked my boss if she could explain the matching to me and she wasn’t aware of this. She realized she hit the max in July, so she’s missing out on nearly half of the available match. I know there’s others that are not aware of this. I don’t believe my company was trying to short-change people. It is just easier to do the calculations on a payroll period basis. This is one of those unintended consequences. I do believe that my company should watch out for us employees though, and especially something like this.

I have decided I am going to take this up with my company. I’ll be preparing a letter and asking them to 1) implement a true up feature for the 2013 plan year to make sure all those that missed out on matching funds will get them, and 2) to include this information in ongoing 401k education opportunities. Maybe advise employees that are contributing heavily to their 401k’s. It’s a small number of people that even do that; less than 7% of all 401k participants contribute the maximum each year. In our company, that’s probably less than 100 people. So I understand why they don’t necessarily spend a lot of time on this when they are trying to hit the largest number of employees, but what has happened is that the people that are working the hardest to save for their retirement are punished for contributing too much too soon. That’s not exactly fair.

So, if you have a 401k, and are trying to contribute the maximum, double check your plan to make sure you aren’t losing out on any matching funds. I for sure will next year!