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Lower-earning workers win

By Jennie L. Phipps · Bankrate.com
Sunday, December 18, 2011
Posted: 6 am ET

We're only a dozen days from the end of the year, and if you haven't contributed enough to get the full employer match from your 401(k) retirement plan, better get cracking. Here's the reason why.

Some people argue that 401(k) matches actually just reduce the amount of income that employers pay workers. That is, if they didn't match a 401(k), then that money would actually end up in workers' pockets anyway -- in the form of wages. This theory has been part of this year's argument over ways to reduce the deficit.

The Center for Retirement Research at Boston College studied this issue, including the premise that much of the value of 401(k) matches are actually in their tax deferral advantages that mainly benefit high-income workers who face higher marginal tax rates.

The center reached an interesting retirement planning conclusion. It first acknowledged that households in the top fifth of the income distribution received "an estimated four-fifths of all of the tax benefits from 401(k)s and other qualified pension plans." But because of federal nondiscrimination rules for 401(k)s that require broad participation by all employees, employers who want their executives to be able to participate in the plan must make it attractive to lower-earning workers as well. They have to kick in real money for the little guy.

The center concludes that high-earning workers get the tax deduction, while lower earning workers get the cash benefit with employer 401(k) contributions raising total pay for low-income workers by about 70 to 90 cents per dollar of contribution, while higher income workers may get as little as 11 cents for every dollar of employer contribution.

Read it and smile. And make sure you contribute enough to get yours.

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