Personal Finance 

401k Front Loaded versus Incremental Contributions

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Let’s say in a fictional world you have enough money and you are paid enough money that you can contribute the entire amount allotted for a 401k pre-tax contribution in one lump sum at the end of January. Then, let us also assume that your 401k appreciates 1% each month for an annual yield of 11.56% (it’s only 11 months because your January contribution comes at the end of the month), which is a close enough approximation of the S&P’s historical growth. Is it significantly beneficial for you to contribute it all at once or incrementally? ($1272.72 a month, which would put you 8 cents shy of $14k, but accurate enough…)

Well, I’ve wondered so I put it in Excel to see if it really mattered… and it does matter. Given those assumptions, the year end difference amounts to about $743. That $743, which doesn’t seem like a lot, accounts for over half the gain of the lump sum contribution and 4.81% of the value of the total lump sum contribution account. Below is a table:

Month Incremental Total Lump Total Difference
jan $1272.72 $14000 $0
feb $2558.17 $14140 $127.27
mar $3856.47 $14281.40 $243.09
apr $5167.75 $14424.21 $347.34
may $6492.15 $14568.46 $439.91
jun $7829.79 $14714.14 $520.67
jul $9180.81 $14861.28 $589.51
aug $10545.34 $15009.89 $646.32
sept $11923.51 $15159.99 $690.96
oct $13315.47 $15311.59 $723.33
nov $14721.34 $15464.71 $743.29

(Difference refers to the difference in gains)

This is in the optimal case (market is rising, you buy in at the cheapest point with a front loaded 401k) with a lot of assumptions that don’t necessarily hold true. If the market drops, you would lose more in the front loaded 401k than if you contributed incrementally. This is also sort of an analysis of the “dollar cost averaging” concept where you enter a position incrementally. If you believe in dollar cost averaging then you would never consider a front loaded contribution into your 401k.

I don’t know anyone who really front-loads their 401k, none of my friends make enough for this to be even feasible, but it also appears that it would make a significant difference. So if you make enough or have faith in the market, try to contribute as much as you can as early as you can (why some people contribute to a Roth as soon as possible). If you want to go the way of dollar cost averaging, then keep doing it the old fashioned way, a little bit at a time.

{ 8 comments, please add your thoughts now! }

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8 Responses to “401k Front Loaded versus Incremental Contributions”

  1. Joe says:

    A study by Peter Bacon and Richard Williams, professors at Wright State University, tracked lump sum vs. dca (dollar cost averaging) over 780 different 12-month periods from 1926 through 1991. They found that an investor would have done better 64.5% of the time by investing his or her money in a lump sum.

    Dollar cost averaging is great because it’s the only way many of us can afford to invest, and it builds discipline. But, as you point out, it has no magical qualities. Assuming the stock market will continue to trend upwards over long periods of time (hopefully a safe assumption), it’s usually better to be “in” as early as possible.

    Great post, jim.

  2. jim says:

    I did a search on Google and found a print of their study, it’s pretty good.

    Lump Sum Beats Dollar-Cost Averagingby Richard E. Williams, Ph.D., and Peter W. Bacon, DBA, CFP

  3. Joe says:

    I just came across an awesome calculator that compares lump sum and dollar cost averaging in an S&P 500 index fund over a 12 month period, starting in any month since January, 1950. The calcualtor is very sophisticated, even giving credit for interest earned on the money waiting to be dollar cost averaged.

    As would be expected, lump sum investing usually “wins”.

  4. Neo says:

    I do front load my Roth IRA but since I don’t make enough to do the same with my 401(k), I have to settle for the incremental contributions. One reason that incremental contributions would be preferred is because with some company matching programs, they will only provide the match is the contributions are disbursed across the year. So doing the lump contribution might cause you to lose out on $2,000 (in my case).


  5. jim says:

    Let’s say you’re a 3% match on 6% contribution plan, if you put all 6% of your yearly salary in January then they’ll only give you 3%/12 in January and nothing in Feb – Dec? If that’s the case, that’s BS. I can understand them giving you 3%/12 in each month (even if you contribute $0 Feb – Dec) but to not give you the match is probably illegal.

  6. Neo says:

    With my company, for every dollar you contribute, (up to $4,000 or 6% of your pay, whichever is greater), they will contribute $0.50 to your account. I actually just posted how I lost out on a few dollars because I maxed out too early.


  7. jim says:

    That just doesn’t sound right… or fair even.

  8. bob says:

    Neo / jim:

    What if you front-load, but leave off enough so that you still just barely have enough contributions each month left to take advantage of maximal company contributions? Would that be the optimal approach?

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