It's rant time at the Capitalist. Let's focus on the story of Janet and Mike.
Janet and Mike are two middle managers in corporate America. Janet and Mike did all the right things from a career standpoint and now are in their late 30's. One's white and one's not, so in addition to gender diversity, they're diverse in other ways as well.
Both Janet and Mike did what they were supposed to do in America. They went to college, graduated with good grades and got their first job. Then, they did something they didn't have to do. They outworked every other person who was their peer. Just simply outworked them. They sacrificed weekends, late nights after the kids were in bed, you name it. Did it with a smile on their face, because they believed that was how you got ahead in America.
Only after the work was performed and their merit proven did Janet and Mike get the rewards. They got promoted and they got more money. Their hours increased as well, but that was OK because they were taking care of their families.
After the promotions came, Janet and Mike made an interesting choice. They chose not to expand their lifestyle, meaning they had more ability to save. The first place they looked to maximize their savings rate? The tool that had been widely recommended to the bread and butter of any American's savings plan - the 401K. Both Janet and Mike maxed their contribution rates to their 401k, making the most of the opportunity to minimize their taxable income and increase their savings rate as a percentage of income.
Then, they got the news. The Fortune 500 they work for had failed its 401k testing, meaning that complex tests showed that the company's highly compensated employees took greater advantage of the company 401k than did the average employees. Only the highly-compensated classification wasn't reserved for the C-level folks. Janet and Mike were included in that. They both make 110K. They're classified as highly compensated even though they don't have a bonus plan and live in a market with an expensive cost of living.
Janet and Mike looked around for other options, only to find there were no tax-favorable options for them to turn to in order to save for retirement. The Roth IRA (post tax money, but growth of the Roth account is tax free upon withdrawal) wasn't an option since both of their spouses also work and as a result, they don't qualify (made too much as joint filers).
Janet and Mike did all the right things to earn and provide and purposefully didn't fill their lives with empty spending when the promotions came as a result. Unfortunately, it doesn't matter. Regardless of merit, sacrifice, relative cost of living and simply outperforming their peer group, Janet and Mike aren't allowed the same opportunity to save for retirement in a tax-favored fashion as the rest of society because the company failed its 401k testing.
Middle managers who have outworked everyone else - didn't you get the memo? You're part of the super-wealthy. Thanks for your efforts.
(written by an anonymous HR professional who resents telling the Janet and Mike's of the world they don't have the savings opportunity as other employees).
Remember, though, that this Fortune 500 doesn't *have* to fail the HCE testing -- it can get out of the whole messy business simply by offering a 4% match or more. The law is draconian in hopes that Janet and Mike complaining about this will put pressure on management to introduce a match.
Posted by: Steve | August 31, 2009 at 11:14 AM
I'm with Steve.
What Janet and Mike need is an HR pro that realizes if the middle managers in the org are going to be making $110,000 we should probably explore a Qualified Automatic Contribution Arrangement (QACA) plan design.
Perhaps the resentment felt by the "anonymous HR professional" should be internalized to drive looking for existing alternatives. I love the empathy displayed; I just think it should be channeled toward action rather than resentment.
4% (over the course of 6% employee deferrals) doesn’t seem prohibitive for a fortune 500 org in which middle management is making six figures.
Posted by: Andrew | August 31, 2009 at 03:27 PM
I think Steve's point is the larger one, as a nation we more and more are penalizing, even demonizing, wealth - or should I say income, because true wealth is envied and idolized, a la Kennedy. And in our rush to do so, wealth/income is being rapidly definined downward through a whole host of policies.
Posted by: Dan Bowling | September 02, 2009 at 05:15 AM
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Posted by: Aaron Strout | May 20, 2012 at 08:05 PM