Vanguard data shows fewer high earners maxing out 401(k) deferrals

For years the standing instruction to a high-earning client was to fill the 401(k) and leave it alone, but last year only 51% of workers earning $150,000 or more in a Vanguard-administered plan hit the annual deferral cap, down from 60% in 2018, according to Vanguard's How America Saves report as covered by Bloomberg, and among workers earning $100,000 to $149,999 the max-out rate fell to 10% from 22% over the same period. The cap now sits at $24,500 for most savers this year, and the share reaching it has been shrinking even as pay has risen.

Some of the decline is arithmetic, which Vanguard attributes to rising contribution limits and rising incomes: a worker earning $150,000 in 2018 had to defer about 12% of pay to reach the limit, while that same earner now needs roughly 16%. The cap grew faster than the salary, so savers who once cleared it land just under it without changing a thing, and reading the 51% as a verdict on the 401(k) would overstate what the data supports.

The rest of the decline is a choice, and Bloomberg's reporting follows savers making it on purpose for two reasons: some are betting that today's tax rates won't hold, which makes the upfront break on a traditional contribution less valuable if they expect to withdraw at a higher rate, while others want more control over how the money is invested or earlier access to it.

The control rationale is the harder of the two to answer, because it describes a preference rather than a forecast: a client who wants a different set of investment choices than the plan offers is not getting the numbers wrong but saying the account no longer matches what they want from it. That is a conversation about how the client uses the plan, not about the client's discipline.

Charlie Dice is acting on both. The 39-year-old has spent nearly a decade funding her workplace plan and has about half a million dollars saved; she plans to cut her contribution from 20% of pay to 5% — enough to capture her full employer match — and redirect the difference to a brokerage account and a Roth IRA, hoping to retire early and reach savings without a penalty before 59.5. "People, especially my generation, need to not box themselves into one way of thinking because that's what our parents and grandparents did," she told Bloomberg. She lives on a farm outside Lancaster, Pennsylvania, and works helping farmers and ranchers apply for federal loans and assistance.

The tax argument deserves to be separated from the liquidity argument, because clients tend to arrive with the two fused. A saver who expects higher rates in retirement is making a coherent case: a deduction taken at today's rates buys less if the withdrawal is taxed at tomorrow's, but shifting when the tax gets paid is a different decision from reducing how much income gets sheltered, and only the second describes what happens when the marginal dollar moves to a brokerage account. One is an argument about which account should carry the tax; the other shrinks the plan.

For a client who wants the money before 59.5, the trade is plain enough: liquidity now in exchange for the deduction today, and Dice keeps 5% to preserve her full match, the floor worth defending hardest in every version of this conversation. Below the match, the client is leaving part of their pay on the table, and the flexibility argument has nothing to trade against it.

There is a reason this is surfacing now: Fidelity counted a record 769,000 401(k) millionaires in the second quarter, up 19% in just three months, helped by a hot stock market, and a seven-figure balance makes a lower deferral feel affordable in a way a smaller one does not. The behavior isn't confined to that cohort — Dice is making her move at half a million — and the same run-up that produced those balances is what dates the projections sitting in client files.

This publication has argued that the 401(k) savings gap is a plan-design problem, and that plan design is where an advisor earns the relationship — inside the plan rather than at the rollover desk. The savers Bloomberg describes test that case from an unusual direction: for the plan adviser, the relevant detail is how these dollars leave, not in a visible rollover but through the payroll deduction in the amounts above the match, which is what makes the leakage easy to miss. Recordkeepers are already selling into the gap; Ascensus launched a participant-referral workflow last month that connects savers with the adviser serving their employer's plan, across a book of more than 16 million participants and $1.3 trillion in administered assets.

At the desk, a client who cuts a deferral from 20% to 5% has invalidated every projection built on the old number, and the re-run needs a lower savings rate, a smaller deduction against current income, and a larger taxable account to carry the years before the penalty window lifts — and the tax conversation that follows has to price the rate bet the client is actually making. The next How America Saves report will show whether 51% is a waypoint or a plateau. For a household that has already trimmed, the answer shows up sooner, on the next payroll cycle.