The Western Midstream 401k plan has the largest potential employer match of any 401k we have ever seen. An employer match is a great thing, but this one is so high that it requires planning to use it well. Here’s the breakdown:
6% contribution-based match. Dollar for dollar-to get 6%, you have to contribute 6%. The match vests immediately.
5% company contribution
3-10% seniority-calculated company contribution. This replaces a pension or PWA.
The company contributions (last two points above) do not vest immediately. Both contributions fully vest after three years of service. However, the plan document states that your service with your legacy company counts. So, my interpretation is that legacy Anadarko/Oxy employees should be fully vested with the entire match. You can verify your vesting status with HR (something I would encourage most people of any company to do). As I’ve noted before, all company matches of any kind are made pre-tax. This may influence how you save (see below).
For incomes under $200,000, this is a great plan
Most of you reading this are legacy employees receiving a portion of the “PWA replacement” match. In your shoes, you’re receiving a total company match of 14-21%. If your income is in the mid 100’s or below, this is a great deal. You can put in a 6% contribution and (some of you depending on years of service) will see a company match in the high teens (or 21% at the highest level).
This means you have a tremendous savings rate and should be able to accumulate wealth at a level far beyond others with similar incomes.
Depending on your situation, some in this camp may want to forego the tax break and make part of their contribution in Roth dollars. If you’re planning to be at the company for the long-haul, you’re going to have a lot of pre-tax assets.
For example, if you’re making $150,000/year and your spouse has a similar income, you may want to analyze your future taxes. Our current tax brackets jump sharply once your income goes over ~$340,000 (with the standard deduction, marginal rates jump from 24%-32% MFJ*). If your household income is over this $340k/32% level, pre-tax is probably your best option. If it’s under, and you’re in the WES 401k, Roth may be a great option for some of your contribution. Consider this:
Spouse 1 at WES: Age 40. $150,000 income and a 17% match. Remember all employer matching is pre-tax.
Spouse 2 at a different employer: Age 40. $150,000 income with an 8% match.
Let’s assume they already have $400,000 in pre-tax 401k dollars (potentially a low estimate if they started over 15 years ago).
At age 60, they will have almost $5Million in pre-tax assets, and that assumes they change 100% of their contribution to Roth for the rest of their career! If they kept their contributions pre-tax, they’d have over $6.5Million in pre-tax dollars at age 60 (both calculations assuming a 7% annual rate of return).
What’s my point? Even though this is a high-income household, they should likely pay their 24% marginal rate and max out $19,500 Roth contributions in their 401ks. They’ll still have the $5Million pre-tax, but will now have over $1.5Million in their Roth buckets. Oh, and if they do backdoor Roth contributions each year in addition to their 401k, they’ll have an additional $500,000 in Roth assets.
To wrap up this point: This is an incredible plan. You don’t have to be an executive, or even close to it, to reach retirement age with a fantastic nest egg. You simply need to contribute and collect the employer match(es). This alone will put your savings rate higher than 95%+ of Americans.
For high-income earners, you need to do some planning
Note: 402(g) annual limits follow you across every 401k you participate in throughout the calendar year. 415(c), however, does not. Your $57,000 all-in limit restarts with each plan.
As the image above shows, the IRS has two governing rules on funding a 401k. This is very relevant for Western Midstream. It means you need to be aware of your contributions to your other 401k plans this year. You cannot contribute $19,500 in the WES 401k. You can only contribute $19,500 minus any contributions you made to APC/Oxy 401ks in Q1. However, your 415(c) limit does get to restart. There are rules around controlled groups that would forfeit this restart feature, but it appears that they do not apply to WES right now (consult your benefits team for confirmation).
Main point: You do not get to make a full $19,500 pre-tax or Roth contribution if you’ve already made contributions to Oxy/APC. But you do get to put a full $57,000 this year into the WES 401k. Even if you already had $10,000+ go into other 401k’s this year, you still get to put $57,000 in the Western Midstream savings plan.
If you have a high income or looking for another place to save, this is a great opportunity. In the video below, I explain it using a model spreadsheet I made for the WES savings plan. In the next section, I discuss what to do in future years. As you’ll see, it is drastically different than what you should do this year.
Quick note: if WES added some sort of non-qualified plan or some other benefit in the future to collect all of their matching contributions above $57,000, my thoughts on the subject would adjust accordingly.
Planning your contribution level in future years
This is unique due to the significant match, but some high-income earners should contribute way less than 6%. Let’s look at two examples.
$500,000 income with enough years of service for a 10% company contribution. In this scenario, you shouldn’t contribute to the 401k at all. Your 401k will hit the $57,000 (or $63,500 over age 50) without any of your contributions or the 6% regular match.
Next, let’s imagine a $300,000 income and an 8% company contribution. You should probably only contribute 3%.
I am aware that this means you will not receive the full 6% match. In both of my examples, if you contributed 6%+, you’re going to max out your 415(c) $57,000 limit well before the end of the year. So, the company will stop its contributions, because they aren’t allowed to put in any more money.
To put it simply, why would you fill-up your 401k with your own money when you could fill it up 100% with your employer’s money?
Here is a quick video walking through your contributions on my custom spreadsheet.
As you can see, you should likely ramp up contributions this year. You can max out your pre-tax or Roth bucket AND put as much after-tax into the plan as you can. Next year, you won’t be able to do after-tax as the company match will likely get you to the $57,000 all-in max.
Other Items to Note:
Contributions will not automatically switch to after-tax after your max out your elective deferral (pre-tax or Roth).
You can rollover your old APC 401k into your WES 401k by opting in the group rollover–quick note on this: If you have a fair amount of after-tax funds in your APC 401k, you may want to roll over the APC 401k to a Rollover IRA and Roth IRA. Doing this allows your after-tax funds to now grow tax-free in a Roth IRA. If you need your assets in a 401k for backdoor Roth contributions, you can roll your Rollover IRA to the WES 401k before December 31.
Utilize your HSA. Max it out every year but do not spend it. Instead, invest it for the long-term. HSA’s have the pre-tax benefit of a 401k, the tax-deferred benefit of a 401k, and the tax-free distribution benefit of a Roth (when used later on eligible medical expenses). No other savings vehicle has all three of these benefits.
Analyze your long-term disability. The default option is 40% of your income. Unless your income is very high or you have a separate disability policy, this is likely not enough. Remember, you are far more likely to need disability insurance than life insurance during your working years (you need both).
That covers it! If you’d like to learn more about how this plan applies to your specific situation, you can schedule a time for a call here.