Let's review Employer Match - part III

In yesterday's post, we reviewed how Employer Match works in best scenario.

For some of you, there may be a requirement that you need to contribute in each of the paycheck to get an employer match in that month. What would mean is that if you don't contribute to 401k for a given pay check, there may not be any contribution by employer in that pay check.

This may occur if you try to allocate higher percentage to your 401k or if you try to "front-load" 401k in the months where you get higher income.

Scenario:

If you are earning $1,00,000, and contributing 20% a month to 401k, you will be putting in $833 a month. If your employer has 50% of employee match upto first 6%, it would mean that employer will add $125 a month.

For year 2015, max limit for a regular employee to contribute is $18000. As per the contribution table below, that limit will be reached by 11/30/2015, causing no contribution by employee in December 2015 and hence causing no contribution by employer as well. Essentially losing $250 of employer contribution.

Date	Paycheck	Employee contribution	Employer Match
1/15/2015	$4,166.67	$833.33	$125.00
1/31/2015	$4,166.67	$833.33	$125.00
2/15/2015	$4,166.67	$833.33	$125.00
2/28/2015	$4,166.67	$833.33	$125.00
3/15/2015	$4,166.67	$833.33	$125.00
3/31/2015	$4,166.67	$833.33	$125.00
4/15/2015	$4,166.67	$833.33	$125.00
4/30/2015	$4,166.67	$833.33	$125.00
5/15/2015	$4,166.67	$833.33	$125.00
5/31/2015	$4,166.67	$833.33	$125.00
6/15/2015	$4,166.67	$833.33	$125.00
6/30/2015	$4,166.67	$833.33	$125.00
7/15/2015	$4,166.67	$833.33	$125.00
7/31/2015	$4,166.67	$833.33	$125.00
8/15/2015	$4,166.67	$833.33	$125.00
8/31/2015	$4,166.67	$833.33	$125.00
9/15/2015	$4,166.66	$833.33	$125.00
9/30/2015	$4,166.66	$833.33	$125.00
10/15/2015	$4,166.66	$833.33	$125.00
10/31/2015	$4,166.66	$833.33	$125.00
11/15/2015	$4,166.66	$833.33	$125.00
11/30/2015	$4,166.66	$500	$125.00
12/15/2015	$4,166.66		$0.00
12/31/2015	$4,166.66		$0.00
Total	$100,000.00	$18,000.00	$2,750.00

Let's review Employer Match - part II

In the link I shared here and there , I touched upon employer match to 401k.

One common match done by employers is 50% of employee match upto first 6%. What it really means is that employer will match 50% of employee's contribution, but they will not contribute more than 3% of the paycheck at any point of time.

How does this play out?

If you are earning $1,00,000, and contributing 18% a month to 401k, you will be putting in $750 a month. If your employer has 50% of employee match upto first 6%, it would mean that employer will add $125 a month - that is $3000 of free money added to your 401k by end of the year.

Date	Paycheck	Employee contribution	Employer Match
1/15/2015	$4,166.67	$750.00	$125.00
1/31/2015	$4,166.67	$750.00	$125.00
2/15/2015	$4,166.67	$750.00	$125.00
2/28/2015	$4,166.67	$750.00	$125.00
3/15/2015	$4,166.67	$750.00	$125.00
3/31/2015	$4,166.67	$750.00	$125.00
4/15/2015	$4,166.67	$750.00	$125.00
4/30/2015	$4,166.67	$750.00	$125.00
5/15/2015	$4,166.67	$750.00	$125.00
5/31/2015	$4,166.67	$750.00	$125.00
6/15/2015	$4,166.67	$750.00	$125.00
6/30/2015	$4,166.67	$750.00	$125.00
7/15/2015	$4,166.67	$750.00	$125.00
7/31/2015	$4,166.67	$750.00	$125.00
8/15/2015	$4,166.67	$750.00	$125.00
8/31/2015	$4,166.67	$750.00	$125.00
9/15/2015	$4,166.66	$750.00	$125.00
9/30/2015	$4,166.66	$750.00	$125.00
10/15/2015	$4,166.66	$750.00	$125.00
10/31/2015	$4,166.66	$750.00	$125.00
11/15/2015	$4,166.66	$750.00	$125.00
11/30/2015	$4,166.66	$750.00	$125.00
12/15/2015	$4,166.66	$750.00	$125.00
12/31/2015	$4,166.66	$750.00	$125.00
Total	$100,000.00	$18,000.00	$3,000.00

To maximize, you may need to add at least 6% to your 401k every month (that's how most plans are typically set up, please check with your company as well as your plan administrator) to be sure. If they do what is called as "true-match", you are one of the lucky ones.

401k mistakes

Here is an interesting article from Forbes related to 401k. http://www.forbes.com/sites/ashleaebeling/2012/01/13/the-big-401k-match-mistake/

The article is slightly outdated in terms of limits it describes for 401k, but some of the content is still relevant for today.

Employer Match for 401k

Employer Match for 401k

What is Employer Match?

Some employers match part or all of employee contribution to 401k to encourage retirement savings. This is an attractive benefit offered by employers. Employer contribution does not count towards $18,000 contribution limit for year 2015. But it does have its own separate limits. 

How does this work? 

Let's say, you will earn $100,000 as your annual salary for year 2015. In order for you to reach maximum employee contribution of $18,000, you will need to contribute at 18% to your 401k. Your employer has a 100% match to employee contribution (if you contribute 18%, your employer will contribute 18% as well).

Salary	$100,000.00
401K Contribution in percentage	18%
401K Contribution in amount	$18,000.00
Maximum Allowed for Employee Contribution for 2015	$18,000.00
Net Contribution to 401k by Employee	$18,000.00
Amount per paycheck (26 paycheck)	$692.31
Amount per paycheck (24 paycheck)	$750.00
Employer Match percentage	100%
Employer Match in Amount	$18,000.00
Net Addition	$36,000.00

In such scenario, if you contribute $18,000 to your 401k, your employer will contribute $18,000 to it.

Impact of investing over a period of time

We talked about investing over a period of time in my last post.

Let's see how it works:

Scenario: Invest into FBGKX as part of 401k with $$230.77 at each paycheck (26 paycheck in the year) in year 2014. Purchased this mutual fund at the beginning of the trade in the opening price.

Investment Table

Date	Open	High	Low	Close	Amt	# Acquired
1/13/2014	62.69	64.01	62.69	63.75	230.77	3.68
1/27/2014	61.66	62.7	61.44	62.45	230.77	3.74
2/10/2014	63.8	65.23	63.8	65.23	230.77	3.62
2/24/2014	66.29	66.89	66.29	66.66	230.77	3.48
3/10/2014	66.97	66.97	65.42	65.42	230.77	3.45
3/24/2014	64.91	64.95	63.84	63.95	230.77	3.56
4/7/2014	62.69	64.36	61.32	61.32	230.77	3.68
4/21/2014	63.49	64.24	62.69	62.69	230.77	3.63
5/5/2014	63.87	63.87	62.69	62.97	230.77	3.61
5/19/2014	63.95	64.92	63.48	64.92	230.77	3.61
6/2/2014	65.79	66.81	65.71	66.81	230.77	3.51
6/16/2014	66.6	67.64	66.6	67.64	230.77	3.47
6/30/2014	68	69.13	68	69.13	230.77	3.39
7/14/2014	68.46	68.46	66.94	68.06	230.77	3.37
7/28/2014	68.24	68.34	66.63	66.63	230.77	3.38
8/11/2014	67.27	68.25	66.99	68.25	230.77	3.43
8/25/2014	70.2	70.37	70.1	70.32	230.77	3.29
9/8/2014	66.89	66.89	66.29	66.45	230.77	3.45
9/22/2014	66.08	66.68	65.35	66.08	230.77	3.49
10/6/2014	65.23	65.39	62.71	62.71	230.77	3.54
10/20/2014	63.31	65.54	63.31	65.54	230.77	3.65
11/3/2014	67.51	67.57	67.11	67.52	230.77	3.42
11/17/2014	67.91	68.67	67.91	68.67	230.77	3.40
12/1/2014	68.43	69.5	68.43	69.5	230.77	3.37
12/15/2014	66.51	68.74	65.56	68.74	230.77	3.47
12/29/2014	69.32	69.32	68.48	68.48	230.77	3.33
Total					6000.02	91.01

At the end of the year, if we take closing price of 68.48, the valuation of portfolio would be at $6232.38, and that is not including dividend earned.

Dividend Earned

Date	Amount/Unit	Addition to 401k
9/5/2014	3.528	211.3186
12/12/2014	0.628	52.88484
Total		264.20344

Dividend earned would have been $264.20

Summary

Net Addition to value would be $232.38+$264.20=$496.58.  I have not factored reinvestment of dividend to keep this example simpler. Typically, all the dividend does get reinvested.

Source of rates: Yahoo