Filed Under:Life Insurance, Life Planning Strategies

Workers misinformed about 401(k) contribution limits

Workers perceive a drop in the maximum amount they can defer from income taxes by contributing to a 401(k).
Workers perceive a drop in the maximum amount they can defer from income taxes by contributing to a 401(k).

Workers plan to contribute less to their 401(k) retirement accounts in the year ahead relative to 2012, new research shows.

Brightwork Partners LLC discloses this finding in “Mercer Workplace Survey 13,” the product of proprietary research conducted for Mercer’s U.S. Benefits Administration business. Tracking employee attitudes toward, and experiences with, employer-sponsored retirement, health and benefits programs, the survey is based on responses from active 401(k) plan participants.

The survey observes that workers expect to contribute less to their 401(k)s this year than last year: $7,402 on average per person in 2013 versus $7,995 in 2012. The dip is noted among both workers over age 50 ($6,708 vs. $8,242) and under age 50 (7,608 vs. $7,877).

Concurrent with these declines, both older and younger workers perceive a drop in the maximum amount they can defer from income taxes by contributing to a 401(k).

“This leads to a compelling and troubling arithmetic,” the report states. “Do participants under 50 really believe that they are contributing at about 88 percent the tax-deferred max as [the above] responses indicate—when in fact their deferrals on average are about 43 percent of the max? And does the 50 and over crowd really think they are deferring at 81 percent of the max when their reality is barely 29 percent. How much tax efficiency are they leaving on the table, knowingly or unknowingly?”

The survey reveals that more than three quarters (77 percent) of employees expect economic growth in the year ahead, up four points from 2012 and matching the post-recession optimism recorded in 2010. The proportion of respondents expecting a recession dipped to 23 percent.

Fewer workers this year (40 percent of 401(k) plan participants) are considering delaying their retirement beyond their original target date. This compares 44 percent in June 2012 and 42 percent in July 2011.

Over the same period, job security, as measured by the share of workers concerned about losing their jobs over the next 12 months, edged up two points. Workers over age 50, the report notes, feel more secure than those under age 50.

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Nichole Morford

Nichole Morford
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