I periodically get emails from my company's HR department containing a summary report about our 401k program-- the value of the assets, administrative expenses, how much was contributed and paid out, etc. I usually ignore it. But this time, I didn't: I read it, and even did a little math to calculate how many employees might be participating and what the approximate rate of return was overall on the plan's investments. I didn't see anything that caused me alarm, and it was sort of interesting.
I was curious about it this time because I'd heard a rumor that our 401k plan could be in danger of failing the discrimination test-- in a nutshell, if highly compensated employees (HCEs) are contributing a much higher percentage of their salaries than non-highly compensated employees, it's considered discriminatory because the HCEs are getting more of a benefit than others. If a plan fails the test, HCEs might have some of their contributions refunded, and the allowed contribution amounts might be capped at a certain percentage of employees' salaries.
When you think about it, publishing seems like an industry where 401ks could easily run into this problem. The industry is largely based in New York, where the cost of living is extremely high. Yet average salaries are extremely low. So you're likely to have a lot of people who feel they can't afford to contribute until they start to get into the pay range of HCEs. For 2007, an HCE is defined as someone whose compensation is $100,000 or more this year, which doesn't go all that far in NYC. I think a company I used to work for may have had to limit 401k contributions for this reason-- I may be remembering wrong, as I wasn't as informed about these issues back then, but I think contributions were capped at a percentage, rather than the full dollar amount allowed annually for other plans.
At this point in my life, I'm about to cross the line into being an HCE myself-- whoopee, what a milestone! They should send you a lapel pin, or a Girl Scout-type badge or something... But since I am committed to maximizing my retirement savings by this method, I'd be annoyed if I could no longer contribute my full $15,500 or whatever the amount ends up being for future years. I hope our HR department is doing a good job talking entry-level employees into signing up for the 401k! And not just for my own selfish reasons...
In any case, I have no way of knowing where we stand on the HCE vs. non-HCE contributions just from reading the summary annual report, though the overall contributions vs. our number of employees suggests very few people max out their contributions. I guess that information might be in the full annual report, which I can request a copy of if I want to. I liked this paragraph at the end of the summary:
You also have the legally protected right to examine the annual report at the main office of the plan at XXX Publishing Company, New York, NY 100xx, and at the U.S. Department of Labor in Washington, D.C. or to obtain a copy from the U.S. Department of Labor upon payment of copying costs. Requests to the Department should be addressed to: Public Disclosure Room, N1513, Employee Benefits Security Administration, U.S. Department of Labor, 200 Constitution Avenue, N.W., Washington, D.C. 20210.I wonder how many people show up at the Department of Labor asking to read their 401k annual report?!? It would be interesting to try it... I smell a My Open Wallet field trip in the making!