401(k) Waiting Periods - Why and What to Do
Something I just can’t figure out about some companies’ benefits - 401(k) waiting periods. Why in the world would a company limit how soon you can start participating in their 401(k) plan? It goes totally against the current movement toward automatic enrollment, yet some places it persists.
Why? The party line
I had occasion recently to take a look at the benefits package of a medium-size company that had a waiting period on their 401(k). When I did a little research, I could only find a couple of pretty weak reasons for a waiting period.
- 401(k) administration costs money, so a company wants to make sure you’ll stick around before incurring start-up costs. This doesn’t make sense to me for two reasons. First, these ‘administrative costs’ are tiny for each additional person in the plan. Second, how does waiting three months or six months overcome this objection?
- Means testing puts limits on contribution levels for participants if there are enough non-participants. I guess companies that have waiting periods figure you’ll start out as a non-participant and lower their means testing ceiling. Again, though, this doesn’t really make sense as the principal of inertia says people who have to take action to make a change tend not to do so. If you’re prevented from participating, even temporarily, in a 401(k) plan, your chances of never participating are much higher. By the time the six month waiting period expires, you’ve gotten used to your full paycheck and likely will have forgotten all about retirement savings. Dumb.
Regardless of the reason, 401(k) waiting periods exist at a shockingly high number of companies. The data I could find says a third of companies have a waiting period and a quarter have a one year waiting period! Simply amazing.
How to overcome a waiting period
If you do take a position at a company with a 401(k) waiting period, there are a couple of strategies you can employ so you don’t lose too much ground saving for retirement.
- Use an IRA as a substitute. You can use an IRA as a low-rent substitute for a 401(k) in a pinch. You have two choices - deductible (or ‘traditional IRA’) and Roth. In general, I think the Roth is the better deal, but it has no current-tax-reducing qualities, so if you’re looking to reduce your taxes this year, the traditional IRA might be for you.
- Save outside a traditional retirement plan. Once you’ve maxed your IRA for the year, you can start saving in a taxable investment account. This isn’t really such a bad idea, because you can use such an account for anything, not just retirement, so if something else comes up, the money’s there.
- Negotiate with the employer. This might seem far-fetched, but after a hiring manager knows he or she wants you, you have a bit of leverage. Traditionally, people just ask for more money. If the 401(k) is important enough to you, and you’re important enough to them, there may be room to move.
- Save outside the plan then save twice as much once you’re in the plan. Start saving in a savings account from day one of employment. Then once you’re eligible, make your contribution twice as much as you normally would and live off part of the savings account each month to fill in the gap in your monthly budget.
- Be more aggressive. Once you’re eligible to save in the 401(k), you can be a bit more aggressive with your asset allocation than you normally would, at least for a little while. This strategy isn’t without risk like the others are, though, so consider it carefully. Besides, being more aggressive is easy to say and hard to do sometimes.
December 4th, 2007 at 9:13 am
I like the idea of trying to negotiate. Hadn’t thought of that before. Then again, I’ve never had the option of a 401(k) either. Oh well, give it time.