New 401k, need advice to maximize match, post tax

[nutty08]

I just started a new job after leaving the DoD. Here's the details on the 401k offered with the company:

Before-tax and/or Roth 401(k) after-tax contributions are limited to $18,000 per year

Contributions will automatically stop if you reach the before-tax and Roth after-tax deferral limit of $18,000 or the plan
compensation limit of $270,000 in YTD eligible compensation, whichever occurs first

Employees may contribute up to 10% of pay after-tax, up to a maximum of $27,000 per year

Employee’s before-tax or Roth after-tax deferral as a % of eligible compensationEmployer match as a % of employee’s
contribution

EXAMPLE: Mary, a Tenet employee, earns $52,000 a year. She elects to contribute 8% to her 401(k) each year.
Employee’s annual compensation Employee’s 401(k) contribution Employer match
$52,000 $4,160 ($52,000 x 8%) $1,560 ($52,000 x 6% x 50%)
The employer match is credited to employee’s account in the following year if eligibility requirements are met.

 

I'm currently in the 2yr guarantee portion of a 5yr productivity driven contract. My guarantee is above the $270k contribution limit.

If I'm reading this correctly, my employer match will be 50% of 6% of $270K, no matter fast fast I reach the $18K contribution limit. Correct? I don't want to max this thing our in June/July and miss out on employee match down the road. Also it seems I get closed out at $270k? Unlike most 401k's....

Now, what are the thoughts on the $27K after tax? There is a Roth option in the plan and I can potentially roll that over at the end of the year. I need to discuss with the manager of the plan to see the details (Fidelity). Is the the best use of the money?

There is a Deferred Compensation Plan which offers a 3% match AFTER the 401k $18K contribution limit is reached. I'm nervous about this because you have to give 12mos notice of withdraw, and my company has a bond rating of Ba3 and is ~$30% owned by activist investors/hedge fund. I'da rather have some certainly and forgo the 3%....but if there are strong opinon otherwise I'm happy to hear them.

 

I'm planning on doing a back door IRA as well.

 

thanks

 

-jd

 

 

[Hank]

I think you have to talk with HR to see how it works where you can't contribute once you go above $270K in compensation in a given year.  I suppose you can set your contribution rate to 6.67% and hopefully get the full match from your employer.

Assuming low enough fees and good investment choices, I really like the 10% after tax option.  Better than investing in taxable for retirement outside of the employer's plan, because the contributions can become Roth dollars.  Does this plan permit in-service withdrawals?

I'm a bit confused by your description of the defined compensation plan.  Is this a dollar for dollar match on up to 3% of compensation?  Does the employer match with 50 cents for every dollar you put in?  I like the possibility of an instantaneous 100% or 50% return.  I probably would roll the dice and risk 3% of my pay above $270K per year, despite your employer's bond rating.

[nutty08]

Thanks

 

On the DCP, I oversimplified for time, as I was trying to post with a 3yo on my leg and a 1yo crying.

It's  actually "Up to an additional 6% towards a company match. The match is 50% on deferrals between 1% and 6%."

And the match doesn't start until 401k contribution limit is hit.

 

Regarding withdraws, I found this verbage "IN-SERVICE WITHDRAWALS
 Active employees, age 59½ or older, may withdraw all or a portion of their account, for any reason, at any time
 All or a portion of employee’s after-tax or rollover account contributions may be withdrawn at any time"

So I think I'm ok there.

thanks for assistance.

-jd

[jfoxcpacfp]

fwiw, the $270k is not "unlike most 401k's", but the actual IRS regulation regarding maximum contribution calculations. The figure increases periodically (it was $265k last year). Not all SPDs actually articulate the $270k in that way, but they all must follow the same rules. See Compensation Limit for Contributions in the last paragraph.

[ajm184]

I would be very deliberate with respect to contributing to your company's deferred compensation plan:

a. A Ba3 credit rating is equivalent to a BB- and is three levels below investment grade, too much debt, low liquidity/ cash flow, large acquisition write off etc.

b. You need to understand why the company is rated Ba3 and the motivation of the activist; because of an activist shareholder attempting to derive value or are they circling for a pre-packaged bankruptcy.

c. A defined contribution plan is subject to seizure by creditors in bankruptcy:

https://www.nytimes.com/2017/08/01/business/dealbook/lehman-bankruptcy-ruling-shows-risk-of-deferred-compensation.html

 

IMO, contribute the 3% to a taxable account you control and avoid the deferred compensation plan until your company is on much firmer ground from a financial/credit standpoint.

[nutty08]

@Johanna, thanks for the reply. I appreciate your expertise. I think my confusion surrounds this statement about my plan:

"Contributions will automatically stop if you reach the before-tax and Roth after-tax deferral limit of $18,000 or the plan
compensation limit of $270,000 in YTD eligible compensation, whichever occurs first"

 

From this page: https://www.irs.gov/retirement-plans/401k-plans-deferrals-and-matching-when-compensation-exceeds-the-annual-limit

"Example: Mary, age 49, whose annual compensation is $360,000 ($30,000 per month), elects to defer $1,500 per calendar month, up to $18,000 for the 2016 year. Mary may contribute to the plan until she reaches her annual deferral limit of $18,000 even though her compensation will exceed the annual limit of $265,000 in September."

It seems that the above IRS example doesn't apply to me, correct? I'm still waiting on clarification from HR.

 

 

Later in same IRS webpage:

"Although not common, a plan can specifically require that salary deferrals cease once a participant’s compensation reaches the annual limit.

If your plan specifies that salary deferrals be based on a participant’s first $265,000 of compensation, then you must stop allowing Mary to make salary deferrals when her year-to-date compensation reaches $265,000, even though she hasn’t reached the annual $18,000 limit on salary deferrals, and must base the employer match on her actual deferrals."

 

 

 

 

 

@ajm184, yes for all those reasons the DCP makes me nervous. I'm leaning towards declining the 50% match on 6% just for peace of mind (which has some value)

 

 

 

[Hank]

All right, time for a decision tree!  (All those operations research classes didn't go to waste.)  As a simplifying assumption, suppose that there are only two possible outcomes with the defined contribution plan:

1) You lose your entire contribution; or

2) You gain a 50% match and keep your contribution and the match.

Let's use the full 6% contribution as a starting point.  If you have a 60% probability of losing your contribution and a 40% probability of keeping the contribution and the match, then mathematically you ought to be indifferent to the results.  (This also assumes that you get a whole bunch of iterations of this event and get to keep the average result.  Clearly this isn't the case.)

Loss of defined contribution is 0.6 X -6% = -3.6%

Gain of defined contribution is 0.4 X 9% = 3.6%

Add up the probability weighted distributions times their magnitude (or severity) and you get a mathematically equal outcome.  If the risk of a total loss is less than 60%, then you should go with the DC plan.

Now we don't know ahead of time just what the actual probability of a total loss would be in the DC plan.  There also is the chance of a partial rather than a total loss of the money in the DC plan.  This again argues in favor of using the defined contribution plan.

Overall, I'd look deeper into the financial condition of your employer and the past behavior of the activist investors.  Assuming 6% of income over $270K is a relatively small amount of what you're saving every year, then the math very well could favor using the DC plan.  Then again, don't burn up stomach lining and lose sleep at night.