401K contributions-dollar cost avg

[Bigdawg]

Instead of 26 equal payments/contributions to my 2016 401K I am thinking about fully funding my 401K in the first three months of 2016. This would seem to go against the dollar cost avg commandment (don't market time!!!).

Thoughts??

 

[REWahoo]

Does your company do matching funds? Will this have any impact on those contributions?

 

[pb4uski]

+1 check on your match works if you have a match. Where I used to work in order to get a match you needed to have a contribution in that period so I had to spread my contributions out over the year and adjust the rate after we received our bonuses for the year in September. It was a minor inconvenience for "free" money.

 

[Bigdawg]

Does your company do matching funds? Will this have any impact on those contributions?

They match dollar for dollar on 3%. I haven't asked/researched if my plan would affect that match.

 

[pb4uski]

If it works the way my old plan worked you would need to have at least 3% withheld each pay period to maximize the match. YMMV as different employers have different practices.

 

[jjquantz]

DW has to have a contribution each pay period in order to get a match.

 

[cathy63]

Instead of 26 equal payments/contributions to my 2016 401K I am thinking about fully funding my 401K in the first three months of 2016. This would seem to go against the dollar cost avg commandment (don't market time!!!).

Thoughts??

What's your reason for front-loading the contributions?

I'm planning to do the exact same thing, but I'm expecting to retire sometime during the year, and want to get as much into pre-tax savings as I can. My employer makes a contribution once per year in May, and you have to be employed on the previous Sept 30th to get it, so contributing early doesn't hurt me but leaving early in the year does.

 

[marko]

You'll likely miss out on 9 months of match.

 

[Senator]

I do a 75% contribution rate and max out my 401K by mid-March. I have done this for at least 12 years.

If the market goes up or sideways, you generally win. If it goes down, you lose. You get more in before May, which might be something good.

Generally, money in sooner is better than money in later. If you get laid off, you are maxed out.

My company matches the 2016 contributions in January 2017. It doesn't matter when they go in.

It also teaches you how to live on less.

 

[target2019]

Megacorp had a 25% contribution limit. Possibly, yours may do this.

I used to set the contribution to 25%, then adjust downwards as I got close to max. Then there was the catchup contribution. I had weekly pay.

In the last year when things got dicey, I used stable value fund in case I needed to draw. Which I didn't.

I have a current 401k, do this thread will be interesting.

 

[Bigdawg]

What's your reason for front-loading the contributions?

I'm planning to do the exact same thing, but I'm expecting to retire sometime during the year, and want to get as much into pre-tax savings as I can. My employer makes a contribution once per year in May, and you have to be employed on the previous Sept 30th to get it, so contributing early doesn't hurt me but leaving early in the year does.

My reason for front loading is two fold. #1. I don't need the income from this JOB. #2. Might as well get the whole 24K working for me as soon as possible.

 

[pb4uski]

In that case then front-load to your heart's content unless front-loading adversely affects your match (which is likely). I don't think it makes a huge difference either way.

 

[marko]

My reason for front loading is two fold. #1. I don't need the income from this JOB. #2. Might as well get the whole 24K working for me as soon as possible.

This makes sense only if your employer match pays on the full amount at time of deposit. Many/most plans only match on a monthly/weekly pay period. This avoids people going for a large lump sum match and then booting in March or April.

If it's by pay period, you'd miss out on several months of match and then you have an entirely different set of calculations.

 

[Willers]

They match dollar for dollar on 3%. I haven't asked/researched if my plan would affect that match.

We did this in DW's 401k because they did an end of year "true up" that paid all of their match regardless of the contribution schedule. My current employer matches 3% each pay period based on the annual salary. If I contribute ahead I lose the match for the later periods.

Check with your administrator. They can give you guidance on this.

 

[Big_Hitter]

They match dollar for dollar on 3%. I haven't asked/researched if my plan would affect that match.

double check - there is no reason they can't match the full amount, it's just PITA for the 401k vendor so some plans don't allow for it - we do a true up at the end of the year for front loaded k contributions - I front load my catch up

 

[Cobra9777]

...Many/most plans only match on a monthly/weekly pay period. This avoids people going for a large lump sum match and then booting in March or April...

Seems to me that's an easy problem to solve. Some companies do the true-up at year-end. So if they were concerned about people taking the full match early and then leaving, they could have a policy that only does the true-up for active employees. My former Megacorp continued to pay the match each pay period (at the stipulated % of pay) as long as prior contributions warranted it. No employee contribution was required. They even made my final matching contributions after I had retired.

I just don't understand why a company would not pay the full match for employees who made the required contribution. I have difficulty believing this is an intentional policy. But maybe it is. Or is it just the result of outdated systems and interfaces between company payroll and the plan administrator?

 

[Big_Hitter]

Or is it just the result of outdated systems and interfaces between company payroll and the plan administrator?

that's my impression

 

[marko]

double check - there is no reason they can't match the full amount, it's just PITA for the 401k vendor so some plans don't allow for it - we do a true up at the end of the year for front loaded k contributions - I front load my catch up

I suspect the reason is so that they can have a more level cash management. If everyone wanted a maximum deposit match within a few weeks/months that could represent a huge cash hit for a company's cash flow.

You're suddenly hit with a full year's expense in the first quarter. Not a good thing. You have to come up with money you haven't made yet.

 

[pb4uski]

probably right that it is outdated systems but if one has YTD earnings, YTD 401k withholdings, YTD match and the match formula it should be relatively easy to do an on-the-fly YTD calculation and do a YTD true up the match is it is too low. But that would be work.

 

[Cobra9777]

I suspect the reason is so that they can have a more level cash management. If everyone wanted a maximum deposit match within a few weeks/months that could represent a huge cash hit for a company's cash flow.

You're suddenly hit with a full year's expense in the first quarter. Not a good thing. You have to come up with money you haven't made yet.

Reasonable theory. But again, easy problem to solve by spreading the match or year-end true-up. Also, most employees can't handle the cashflow hit from front-loaded 401K contributions. So even if a company matched upfront, I doubt this would be so widespread as to cause any cashflow or P&L concern. I think it's outdated systems, and probably low-priority to fix because it affects so few employees.

 

[Big_Hitter]

the explanation I've received from vendors (this was years ago) on this subject is that "but there's nothing to match for the remainder of the year if the contribution is front-loaded" - a quick reading of the code and regs shows that matching a frontloaded contrib is clearly allowable

 

[Bigdawg]

I don't care WHEN they give me the 3% match. I just want to make sure they DO give me the 3% match. I won't be vested until the 2 yr mark. Currently 4 months in, 20 to go. Basically I want the compounding on the 24K starting in April each year. If the 3% gets added 9 months later, so be it.

 

[Alan]

I used to time my contributions so that I hit the max allowed in December but then I discovered that my company gave the 3% match even in the months after I'd maxed out. From that year on I'd put away the max allowed each month (20% I believe at the time) and the last few months of the year would show zero contributions from me but a 3% match from the company.