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Fewer Vanguard savers on $150,000-plus salaries max out 401(k)s as the limit takes more of their pay
Vanguard says 51% of its 401(k) participants earning $150,000 or more maxed out last year, down from 60% in 2018. For employers, the open question is whether senior staff are leaving the plan or trimming what they defer above the company match, and the one case reported in detail is a trim.
The Board Room · Leadership desk
What happened
- Among Vanguard participants earning $100,000 to $149,999, the share maxing out fell to 10% from 22%, according to the firm's How America Saves report.
- Charlie Dice, 39, with about $500,000 in her 401(k), plans to cut contributions from 20% of pay to 5%, keep the full employer match and move the rest to a brokerage account and Roth IRA, Bloomberg reported.
- Fidelity counted a record 769,000 401(k) millionaires in the second quarter, up 19% in three months.
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Why it matters
- contradiction Vanguard attributes part of the fall to a higher limit, while the experts Bloomberg quoted describe deliberate moves into other investments. The headline decline overstates how many senior staff chose to save elsewhere.
- decision Benefits teams that track max-out rates will count each rise in the limit as lost ground, so match take-up among senior staff is the better gauge of whether employer money is still landing in the plan.
- precedent Entrepreneur links easing off to savers who already hold large balances. As more senior staff build them, more are likely to take the match and put the remainder outside the plan.
A worker on $150,000 who maxed out in 2018 put in about $18,000 [14]. The same salary now has to put in about $24,000 to reach the cap, roughly $6,000 more a year before anyone has changed their mind [14]. Further down the pay scale the effect is sharper. At this year's $24,500 limit [4], a worker on $100,000 would have to put away 24.5% of salary to max out [11]. Workers in the $100,000 to $149,999 band saw the steeper fall, 12 points against 9 for those on $150,000 or more [15]. Vanguard's report, as Entrepreneur summarised it, does not say how much of the overall decline comes from the higher limit and how much from savers choosing to put in less [3].
The other part is choice. According to retirement experts Bloomberg spoke to, a growing number of savers are cutting their 401(k) contributions to chase investments with higher potential returns [16]. Some savers fear higher taxes in retirement will undercut today's savings, and others want more control over their investments and access to their money before retirement [17]. "We need to be more sophisticated than just max it out," Craig Copeland, a director at the Employee Benefit Research Institute, told Bloomberg [8].
The one case Bloomberg reported in detail is a saver trimming what she puts in above the employer match. Charlie Dice fed her 401(k) for nearly a decade before deciding to ease off [10]. Her cut moves three-quarters of her own contributions out of the plan, and none of that money is the employer's [13]. She wants to retire early and draw on savings before 59 and a half without withdrawal penalties [9]. "People, especially my generation, need to not box themselves into one way of thinking because that's what our parents and grandparents did," she told Bloomberg [6].
A richer match might pull some senior contributions back into the plan. It does not change the age at which plan money can be reached without penalty, and that age is the reason Dice gave [9]. If access is what is drawing senior savers toward brokerage accounts and Roth IRAs [17], a higher match approved this quarter could show up in next year's plan data as a bigger bill, with senior contributions staying flat.
What to watch
- Whether Vanguard's next How America Saves report separates the effect of the higher limit from voluntary cuts among earners on $150,000 or more.
- Match take-up figures for high earners who stopped maxing out, which would show whether they are cutting below the employer match or only above it.
- Further reporting on savers like Dice that shows whether early access or investment choice is the main reason senior staff move money to brokerage accounts and Roth IRAs.