401(k) Summer School: You Can Change Your Contribution During the Year
Hi Friendos,
I hope you are having a nice Memorial Day weekend. Where I am, it’s been raining for 24 hours solid, so I’m staying inside, appreciating the coziness of being dry and only having to go out to walk the dog.
This is our second installment of 401k summer school and we have another basic and important lesson.
Lesson 2: You can usually change your 401k contribution any time during the year (not always). The change usually takes effect at the next pay cycle.
What I’m talking about here is your employee contribution, where you are choosing to direct a portion of your paycheck to go into the 401k.
When employers first hire you, there’s usually a window for you to select certain benefits as a new hire. Then, at annual benefits enrollment, they’ll present you with options to change up your selections, like for a medical insurance plan, participating in group life insurance, paying for transit passes with pre-tax money, and so forth, depending on what the employer offers. And contributing to the 401k will be one of those benefits you can select. This sometimes leads people to think they can only change their 401k contribution during annual enrollment. That’s usually wrong!
Hard data on this are a little tricky to find, but in a 2020 survey of over 1,100 households with a 401k participant, 40% of respondents said could change their contribution rate once a month or more often, and 59% could change it quarterly or more often. 12% said they didn’t know, and 13% said they could only change it once a year.
It’s an interesting example of the all the ways each employer can customize a 401k plan. Here are a few other features that can vary from one employer plan to another:
- Whether employees are automatically enrolled into the plan,
- If the 401k plan allows employees to borrow against their 401k account balances.
- What is on the menu of investment options,
- If there are employer contributions to the plan at all, and if so, how generous they are, if they have a vesting schedule, if they require a period of employment before eligibility, and whether they are made only as matching or regardless of employee contributions, and
- Whether the employer absorbs the cost of plan fees or passes those on to the employees who participate in the plan.
The point is, different 401k plans work differently, which means that every time you change jobs you have to learn a little bit about your new 401k (or 403b, or other plan if you are lucky enough to have one at your job). It is worth the effort!
Most people don’t think about changing their retirement plan contributions during the year, but you might want to:
- You get a mid-year raise,
- You read an awesome newsletter about retirement saving (!) and decide to start saving more (huzzah!) and you want to start on that right away, or
- Something else in your life changes, freeing up more resources to save for retirement.
My last tip is: any time you change your contribution, check your subsequent paystub to make sure it went through the way you expected.
-Stephanie
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