I read on https://www.reddit.com/r/financialindependence/comments/7i8olw/list_of_companies_offering_mega_backdoor_roth/dqyayt5/ (mirror):

Even on this thread you'll see some [employer's 401(k) plans] capped at 15% of total income for after-tax non-Roth contributions.

Why would an employer set a limit for the after-tax non-Roth contributions below the IRS limit (54,000 USD in 2017)?


One of the central problems with having one's defined contribution plan run by one's employer is that the 401(k) plan documents are written by lawyers and/or mouth-breathing bureaucrats from HR. Neither of these are finance experts and neither has a strong incentive to do what is best for the employee, especially not unusual employees. In particular, these folks want to avoid procedural questions and requests that may be related to uncommon savings patterns. They often have a very narrow vision of what the plan will accomplish and don't want to be bothered with anything else. As a result, they put in place many restrictions that the IRS does not require and which benefit neither the employee nor the employer.

Once the plan document is written, it is difficult and costly to change, so it doesn't get changed even if the administrator wants to later. While this situation is most common in corporate-run plans, even solo 401(k) plans are not immune. For example, Vanguard will not allow incoming rollovers of IRAs into their solo 401(k) plans even though they are permitted by law, very helpful to people who would like to do backdoor Roths, and would add a lot of capital to their plan. Why? Because whoever wrote it the first time was trying, perhaps without good justification, to keep it simple and now it's difficult and costly to change.

In short, the problem is lazy bureaucrats who have little knowledge and no incentive to help the employee.

  • So you think that the "mouth-breathing bureaucrats from HR" are not themselves employees and plan participants who also wish to maximize their own contributions? As well, I am quite skeptical that very many employers write their own plan.
    – chili555
    Dec 9 '17 at 1:02
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    HR employees are not wealthy enough to contribute 54 thousand dollars a year to their 401(k). Most of them contribute the minimum to get the match. When an employer writes the plan, then it's primarily lawyers, not HR reps. Again, poor incentives. Where I work, a committee of HR reps is in charge of the 401(k) plan and it is painfully obvious that they know nothing about finance...anything beyond the minimum is just work for them.
    – farnsy
    Dec 9 '17 at 1:05
  • Anecdotal, at best. How could you possibly know whether they contribute the minimum, maximum or in between?
    – chili555
    Dec 9 '17 at 1:17
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    In fact, all the people in HR at the company I worked for for 34 years, worked for me, so yes, I've met a few people in HR and administered a 401(k) plan and, for what it's worth, a defined benefit plan, among others. Your answer is on point, as far as we know, for one company and its plan.
    – chili555
    Dec 9 '17 at 3:01
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    Glad to hear we have a different perspective here. It sounds like you have an explanation for this and similar shortcomings of 401(k) plans that does not involve poor incentives or lack of knowledge. I would be interested to hear it (no sarcasm implied).
    – farnsy
    Dec 9 '17 at 4:36

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