In the world of investing, putting a considerable chunk of money to work in the market early on, known as lump-sum investing, can significantly boost your growth potential. This insight comes from a Vanguard study published in 2023. However, it’s crucial to familiarize yourself with your 401(k) plan specifics before rushing into front-loading contributions. Not all retirement plans include a true-up feature, a key point highlighted by financial experts.
In 2023, a survey by the Plan Sponsor Council of America noted that around 67% of 401(k) plans offering matches beyond an annual basis included a true-up. Without this feature, investors might find themselves in a tricky spot.
Ann Reilley, a CFP and the principal and CEO of Alpha Financial Advisors based in Charlotte, North Carolina, explains that many clients face a sort of “penalty for maxing out too early” when there’s no true-up, consequently “leaving money on the table.” To illustrate, imagine you’re under 50, earning $200,000 annually, and your company provides a 5% 401(k) match lacking a true-up. If you contribute 20% over 26 pay periods, you’ll hit the 2025 limit of $23,500 after just 16 paychecks, securing only about $6,200 from your employer’s match. By maxing out early, you potentially forfeit around $3,800 of the match without a true-up adjustment.
To understand these nuances better, it’s wise to review your 401(k) summary plan description, which spells out the key specifics regarding your account, advises Reilley.
Looking ahead to 2025, there are plans for increased deferral limits and catch-up contributions. However, not everyone finds it feasible to maximize their 401(k) contributions due to various financial obligations. According to Vanguard’s 2024 report, “How America Saves,” only about 14% of employees managed to fully max out their 401(k) plans in 2023. This data, gathered from 1,500 qualified plans and close to five million participants, paints a clear picture of the current landscape.
