The New Year is a good time to communicate to employees that the maximum annual participant contribution to 401(k) plans has increased, says one retirement plan expert.
The Internal Revenue Service announced last fall that it was raising the maximum contribution to $17,000 in 2012, up from the $16,500 limit in 2011. Additional catch-up contributions for participants age 50 or older remain at $5,500 per year, in addition to the $17,000.
For employers, the increased limit is an educational opportunity, says Beth McHugh, vice president, market insights, with Fidelity. “Educate and remind employees of the limit and that they can increase their savings and look at optimizing their savings rate,” she says. “Whether you hit the limit or are just looking to maximize the employer contribution, it’s always good to reinforce the savings message.”
Yet in a recent Fidelity Investments survey, more than two-thirds (69%) of respondents did not know the IRS had bumped up the contribution limit for 2012. And of those who did, only a quarter of them (26%) said they knew by how much. When these respondents were then asked what the new maximum limit would be in 2012, only one-in-five (20%) got it right.
The increased limit is an opportunity for employees to take advantage of more tax-deferred savings, says McHugh. “As we know, there’s a small percentage of the population that actually do hit that limit on an annual basis but for those who are doing everything they can to maximize their savings — and it’s often those who are older, in their peak earning years — they can look at their deferral rate and make sure they are adjusting that.”
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