Deferral rate

A deferral rate,also known as a contribution rate, is the percentage of an employee's paycheck that is deducted and contributed to a retirement account, such as a 401(k). Generally, a higher deferral rate can boost the chances of building a larger retirement nest egg. 

When can you change your deferral rate

One of the most common questions about 401(k) deferral rates is when you can make changes to your contribution percentage. The good news is that most plans offer a great deal of flexibility in this regard, allowing participants to adjust their deferral rates at any time throughout the year.

However, it's important to note that not all plans follow this rule. Some may restrict changes to specific time periods, such as quarterly or semi-annually. These limitations are often put in place to simplify plan administration and ensure that any changes align with the employer's payroll processing schedule. You may opt out of the plan by changing your deferral rate to 0% at any time.

If you're unsure about your plan's specific rules regarding deferral rate changes, the best course of action is to reach out to your plan administrator or HR department or review your Summary Plan Description (SPD). They can provide you with accurate information about when you can make changes and any deadlines you need to be aware of.

Keep in mind that even if your plan allows for frequent changes, it's generally advisable to review your deferral rate on a regular basis, such as annually or when you experience a significant life event (e.g., a raise, marriage, or the birth of a child). This can help ensure that you're consistently saving enough to meet your retirement goals while also balancing your current financial needs.

How long does it take for my election to change

If you decide to adjust your 401(k) deferral rate, most employers can process these changes relatively quickly. Typically, you can expect your new deferral rate to be applied within one to two pay periods after submitting your request.

Is the amount you defer limited

Yes, the Internal Revenue Service (IRS) sets annual contribution limits for 401(k) plans to ensure that retirement savings remain fair and equitable across all income levels. These limits are subject to change each year based on cost-of-living adjustments and other factors. 

For the tax year 2025, the maximum amount an individual can defer into their 401(k) is $23,500 for those under 50 years old. This means that if you are younger than 50, you cannot contribute more than $23,500 of your salary to your 401(k) plan during the year, regardless of your deferral rate percentage. Those who are 50 years old and older are allowed to make an additional "catch-up" contribution of up to $7,500. This brings the total maximum contribution for individuals 50 and older to $31,000 per year. For those ages 60 to 63, individuals will have a higher catch-up contribution limit of $11,250.

How does deferral rate work with auto enrollment?

When a 401(k) plan has automatic (auto) enrollment, new employees are enrolled in the plan at a default deferral rate set by the employer in the plan document. This means that a predetermined percentage of each paycheck is automatically contributed to the employee's 401(k) account, unless the employee actively opts out or changes their deferral rate. Auto enrollment as a feature can help increase plan participation rates in 401(k) plans, and businesses that add the auto enrollment feature to a new 401(k) or 403(b) plan may be able to claim a tax credit of $500 per year for up to three years. 

The default deferral rate for auto-enrollment plans is typically lower than the average rate chosen by employees who actively enroll, which can range from 3% to 6% of gross salary. While auto-enrollment is designed to encourage more employees to save for retirement, the default rate may not be sufficient for many individuals to reach their retirement goals. Human Interest suggests plans set default deferral rates to at least 7%.