Strategies if You Can't Make the 401K

You’re a recent grad starting at your first job, or someone who recently switched careers, and you’re eager to get started saving as much money on taxes as you can. You immediately open your 401(k) plan documents only to find that there’s a waiting period. Bummer. You can’t contribute to your 401(k) until you’ve been employed for one year. What do you do?

Unfortunately, not being able to contribute to a 401(k) plan is a pretty common problem. Over 27% of employers nationwide require employees to wait one year, the longest amount allowable by law, before those employees can begin to make contributions. Over 41% require employees to wait six months or longer. I don’t have statistics for legal jobs specifically but I suspect they are similar to the national averages.

If you’re not covered by a retirement plan at work, this can be a material hit to your overall compensation and could be costing you thousands of dollars in tax savings during your first year as well as delaying the start of your retirement.

Employers have a few reasons for making employees wait before they can begin contributions, none of which are particularly compelling:

It saves employers time and money managing small accounts for people that work at the firm for less than a year and then quit.

It’s allowable by law.

Worse, there’s little room for negotiation since employers must treat all employees the same, so you’re not going to get an exception for you specifically.

What can do you do if you’re not covered by a retirement plan at work?

If you’re a new hire with previous legal experience, I would bring this up as part of my overall compensation package.

For example, let’s imagine a lawyer that is starting a new job in January of the new year and is told that he will not be able to contribute to the firm’s 401(k) plan until he’s been employed for a full year.

I’d run some numbers and point out that by missing out on pre-tax 401(k) contributions for a year, I would want to receive $X signing bonus to compensate for the loss.

It’ll be difficult to calculate $X because it’s not as simple as multiplying the annual contribution limit by your marginal tax rate today (since you’ll have to pay taxes on the withdrawal eventually).