Why is my 401k manager recommending me to save more?

Question

I am currently contributing enough to hit the limit (~$18000) per year and get a match of 100% for 4% of it.

My 401k provider (Fidelity) just sent me a quarterly progress email and suggests that I save more. Say 15%. If I do so, I'll cross the 401k limit.

Should I just ignore that recommendation or is there something else I could/should do?

EDIT: I looked at the email again. For the sake of posterity, it does look like they were referring to retirement election (which has 2 sections - Employee Deferral and Roth Deferral). Employee Deferral has the percentages that I am contributing towards 401k.

Exact text of that snippet of the email:

Saving for your future? Check. Contributing the suggested 15%† or more? Not quite—but you're so close! Get there in less than 60 seconds. < Button that says "Yes, Crush it!" >

Answer 1

No one at fidelity told you to save more. Some poorly coded notification system suggested you save a higher percentage of your income with no consideration that your current election is taking you within spitting distance of the maximum.

It's probably important to remember that the custodian is just a vendor of the company you work for. You're entering a payroll deduction rate, the vendor then tells your employer, your employer then adjusts payroll. Generally speaking the payroll deduction process will max you then stop contributing unless you've given them specific instructions to the contrary.

You shouldn't assume that's the case, but fidelity isn't directly reaching in to your paychecks, your company is sending them the contributions and an allocation statement and generally goes out of its way to avoid overfunding.

Answer 2

You didn't mention how old you are, which may be a factor, but as you observe you are already contributing the maximum you can to a 401(k) (or at least close to it).

Most retirement systems have some sort of "retirement calculator" that look at your current savings rate, time to retirement, other retirement assets, and cost of living to determine if you are saving enough to retire by your target age. It either has some default values, or you've put in some values that indicate that your current saving rate will not be enough to meet your retirement goals (e.g. you want to retire in 2 years and make $1 million per year for 30 years in retirement).

Take a closer look at the data they are using, adjust it to your current goals (including other retirement assets) and see if it still suggests you save more.

If you still don't have enough to meet the goals you set, then you can make adjustments. Yes, there is a limit to how much you can contribute to a 401(k) pre-tax, but there are other ways to save for retirement. You can look at Roth IRAs, or non-tax-advantaged accounts to increase your retirement savings.

Also note that if you can contribute to a Roth 401(k), then the after-tax future value of your retirement will be higher since the contribution limit is the same, but the earnings are tax-free at retirement.

Answer 3

It is virtually certain that the reason your investment manager is encouraging you to invest more is because he will make more money if you do. He may have targets to meet and your additional investment would help him reach them.

That is not to say his advice is necessarily bad, but we would need a lot more information to be able to pass an opinion on that.

"Invest more" does not necessarily mean "put more in your 401K". He may be suggesting other accounts.

Answer 4

From the excerpt you posted:

Contributing the suggested 15%† or more?

This makes it pretty clear that they simply have a rule that people contribute 15% or more. It's obviously a silly rule in your case, but I suspect that most people receiving that message make less than the $180,000 per year that you apparently do. For anyone making $120,000 or less, 15% is a quite reasonable goal.

I would guess that they just don't find it worth fixing for the small percentage of recipients who make more than $120,000 and don't just sigh when they see something like that.

If they were really making an informed decision, they wouldn't be asking if you were contributing 15% or more. They'd tell you your contribution percentage. As is, it seems they send the same message to everyone whether they are contributing more than 15%, the max, or not enough.

I notice that I don't actually answer the question you asked, although I hope that this helps clarify things. But the literal answer is that they ask people to save more because their fees tend to be commission-based. So the more you save, the more they make. It's just marketing to increase their revenues.