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…Okay, so you may recall that last week I wrote a post about how employers could give employees a huge leg up on retirement savings by tweaking their plan rules to allow them to put after-tax monies into their 401(k). The utility of making this plan change would be that said employees could then (either at retirement, discharge, or via in-service distributions if allowed) roll these funds into a Roth-IRA and protect a huge chunk of their earnings from taxation at retirement. That said, the problem with leveraging this strategy is two-fold:

  1. Only HCEs are generally going to be able to take advantage of this
  2. The number of companies that can even leverage this option is low, because even employers with safe-harbor 401(k) plans are subject to ACP discrimination testing under 1.401(m)-3(j)(6) on after-tax contributions. So adding an after-tax option and passing the ACP testing is just not going to be possible for many (most?) employers

^In summary, the after-tax 401(k) isn’t really a viable tool for most companies to help their employees get more money into their 401(k). Because while 401(k) savings continue to climb, most employees aren’t currently even maxing their individual contributions.

…And yet with annuity-based pension plans going the way of the dinosaur, the 401(k) needs to take up a much larger portion of the retirement pie for workers in the U.S. than it currently does. This is because personal savings rates beyond 401(k) are very low for most U.S. workers, and social security is only funded through 2034  – with most Gen-Xers and Millennials expecting to never see any of the benefit at all.

^To be sure, despite perceptions to the contrary social security is likely to remain a bedrock of employee’s retirement income well beyond 2034, and growing life expectancies also make working into one’s late 60s and even 70s a viable way to put more money away for retirement. But following the 4% rule, the 12% of income that savers are on average socking away will be nowhere near enough to sustain them in retirement when coupled with social security benefits and (on average) relatively paltry personal savings.

…All of this points to a reality that (I think) employers are going to need to start becoming more aggressive with the matches they provide to employees. Currently the average is around 3% match, and even the top 15% of plans are only offering 6% or so. I think a more aggressive 401(k) match is probably needed here to position workers for a retirement as comfortable of that of their parents, yes? People just aren’t putting away enough money today…

That said, what 401(k) strategies are you seeing out internally or out in the broader marketplace? Obviously on the employee side automatic enrollment is a great way to get employees to sock more away (and at this point I think table-stakes if you really want to encourage employees to take advantage of the employer match), but on the employer side I am sure there must also be some companies doing innovative things to get more money into the pot at a cost they can live with. If you’re seeing or doing something special here, I’d love to hear from you in the comments section below!

Best,

Rory

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