Vanguard ties fewer 401(k) max-outs among high earners to a limit that takes 16% of a $150,000 salary

Vanguard's own example is the place to begin. This year's limit is $24,500 ^[3], and a worker on $150,000 has to defer about 16% of pay to reach it, against about 12% in 2018 ^[6]. The division checks out: $24,500 over $150,000 is 16.3% ^[15]. A saver who has deferred 12% every year since 2018 has dropped out of the maxed-out column without changing a single election. Vanguard adds that wage growth has moved more people into the higher income bands and that deferral rates remain high on average ^[7].

Three readings fit the 9-point fall in the top band and the 12-point fall in the band below it, where the share hitting the limit more than halved ^[16]. Vanguard's reading is that the limit rose faster than pay ^[6]. Craig Copeland of the Employee Benefit Research Institute says people started rethinking the plan about two years ago and the shift has accelerated over the past year. Many now contribute up to the match, then fund Health Savings Accounts, Roth IRAs and brokerage accounts before adding more to the employer plan ^[2]. Zach Hartley, a planner in Athens, Georgia, offers a third, partial explanation: higher living costs ^[14].

I think the Vanguard series mostly measures the limit. The evidence for deliberate reallocation is so far anecdotal. Hartley's figure is one recent week in which nine of roughly a dozen clients were under the cap, and he does not formally track it ^[12].

The figure that would prove that view wrong is deferral as a share of pay among high earners. Vanguard says it remains high on average ^[7]. If next year's How America Saves shows it falling in the $150,000-plus band, the reallocation has numbers behind it.

Charlie Dice's plan shows which dollar moves. Cutting from 20% of pay to 5% ^[10] takes 15 points of salary, three-quarters of her deferral, out of the plan ^[17]. The 5% she keeps captures her full employer match. The rest goes to a brokerage account and a Roth IRA, so she can reach savings before 59.5 without withdrawal penalties ^[10]. She is not giving up the match. "People, especially my generation, need to not box themselves into one way of thinking because that's what our parents and grandparents did," Dice said ^[11].

The tax argument and the access argument lead to different accounts. Savers betting that today's relatively low rates won't last are marking down the upfront break on a traditional contribution, which is worth less if they owe more in retirement ^[9]. In Dice's plan that bet points at the Roth IRA. The brokerage account answers the access question ^[10].

Advisors get the question more often as balances grow. Fidelity's count of 401(k) millionaires reached a record 769,000 in the second quarter, a 19% rise over three months as the stock market ran hot ^[8]. That is roughly 123,000 more than a quarter earlier ^[19]. Hartley describes clients on pace for $5 million when they need $3 million ^[13], a $2 million surplus, or two-thirds more than they need ^[18], and he sometimes recommends they stop short of the maximum ^[13]. "Now we have these successful people doing it. We need to be more sophisticated than just max it out," Copeland said ^[1].