Remember all the hoopla beginning last summer about how the new tax law would destroy 401(k) plans? This “sky is falling” rhetoric continued right up to (and perhaps a wee bit after) President Trump penned his signature on the landmark legislation.
As we all now know, a funny thing happened on the way to 401(k) Armageddon. Among other compensation and benefit increases directly resulting from the 2017 Tax Cuts and Jobs Act, more than 1 out of every 4 companies have already or intend to raise their 401(k) company match, according to Willis Towers Watson. Indeed, news reports indicate the typical company 401(k) match increase stands at 1 percent.
I'll explain this with a straightforward example. You have my permission to use this approach in employee meetings, when you're speaking with plan sponsors, or as you see fit.
Let's be conservative and look at someone just starting out on their career and say they're making $35,000. We'll inflate that salary by 3 percent a year until they retire at age 70. The average return on equities for that time period (48 years) is roughly 11 percent. We'll be even more conservative, however, and assume their retirement savings grow at only 8 percent. Finally, we'll use the average company 401(k) match (2.7 percent) and compare that to adding an additional 1 percent (for a total of a 3.7 percent company 401(k) match).
The difference is astounding. This extra 1 percent will yield an additional $285,166 when the employee retires. That's a quarter of a million dollars!
Are you prepared to experience a greater shock? If we up the starting salary to $65,000 (not unusual for engineers and other specialty positions), then that extra 1 percent brings more than half a million dollars ($529,595) at retirement.
To think, some thought the new tax law would kill the 401(k) plan. The reality is quite the opposite. The law has breathed new life into America's greatest retirement savings vehicle.
The challenge now is to encourage more companies to offer 401(k) plans and their own matching program. There's been a lot of chatter that we'll finally see legislation allowing for the creation of open 401(k) plans. Of course, they've been saying this for a while, so I'll believe it when I see it.
There's no question employees who have a 401(k) plan get a head start when it comes to retirement savings (and, by proxy, retirement itself). This match is the key. At that $35,000 starting salary, every 4 percent put into a 401(k) through a company match grows to more than a million dollars at retirement. (For those lucky enough to start at $65,000, that 4 percent company contribution grows to two million dollars.)
Never believe a story about proposed legislation until that law is actually passed.
Continue Reading for Free
Register and gain access to:
- Breaking benefits news and analysis, on-site and via our newsletters and custom alerts
- Educational webcasts, white papers, and ebooks from industry thought leaders
- Critical converage of the property casualty insurance and financial advisory markets on our other ALM sites, PropertyCasualty360 and ThinkAdvisor
Already have an account? Sign In Now
© 2024 ALM Global, LLC, All Rights Reserved. Request academic re-use from www.copyright.com. All other uses, submit a request to [email protected]. For more information visit Asset & Logo Licensing.