Improving Employee Wealth
The 401(k) retirement savings plans began in 1978 as federal legislation aimed at improving retirement incomes by supplementing public and private sector employee pensions. The models were many but included federal employees who could retire with a substantial portion of their federal salaries after 30 years of service. It was premised on the idea of extending benefits to a wider class than those relative few who enjoyed stock ownership benefits and bonuses.
The Internal Revenue Code
The IRS regulations set limits on 401(k) deferrals and contributions as described here. Salary deferrals limited to a maximum of $17,500 in 2014 and $18,000 in 2015. In addition, for participants age 50 or more, the further sum of $5,500 in 2014 and $6,000 in 2015 as catch-up deferrals. The 2014 maximum annual compensation subject to 401(K) plans is $260,000, and the 2015 maximum is $265,000. In 2014, the allowed total of employee and employer contributions is the lesser of the employee annual compensation or $52,000 and the 2015 amount is $53,000. In each year a catch-up amount for employees aged 50 and over of $5,500 and $6,000 respectively.
What Goes In and What Comes Out
The primary mover in a 401(k) is the employee’s annual contribution, and that is the essential building block. Employee contributions make employer matching funds possible. By analogy to a car, it is the engine. The saver can control the accelerator and boost savings by making the maximum contribution allowed per year. The growth of a 401(k) comes from two sources: the employer contribution and the return on investments made by the plan. Employer contributions can vary by plan and the law imposes an overall matching maximum allowing up to $34,500 in 2014, and $35,000 in 2015.
Most often through an employer, employees enroll in an investment plan to grow contributions through investments. Plans provide options for employee control over the scope and direction of investment in broad categories. When assessing an annual plan revision, employee’s can direct areas for greater or lesser participation. This enables employees to exercise choices and preferences. For example, employees might choose to avoid tobacco stocks, or fossil fuels on social policy grounds. One might choose allocate more to an index like the S&P 500 during a period of rising stock prices or put greater value in bonds when stocks are falling. These choices can maximize earnings.
Ranking Corporate Plans
401(k) plans are an important source of employee wealth-building. For example, one leading company plan model at Conoco Phillips, an employee with a beginning salary of $75,000 could retire with 30 years service and a total of $3.8 million. Abbott Labs is another leader in overall compensation. Until recent years, there was no reliable way to compare corporate 401(k) plans. Overall, employees can consider corporate plans side by side when making choices concerning jobs or career advancement. Energy and biotechnology companies lead the current list of top 401(k) plans while many popular big box retailer firms and social media entities lag far behind in critical indicators such as vesting, and company matching amounts.
Bloomberg News- ranking corporate 401(k) plans
Internal Revenue Code- See IRC Sections 402(g) and 414(v)); (IRC Section 401(a)(17)); and (IRC section 415(c)).