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Walmart offers a robust 401(k) Plan with various account types, cost effective investment options and an employer match. In this article, we'll cover these benefits and address the key decisions participants need to make:
1.) Whether to Contribute to a Pre-Tax or Roth 401(k)
2.) Investing in Individual Funds or Retirement Date Funds
3.) How the Walmart 6% Match Works
1: Pre-Tax or Roth 401(k)?
The Walmart 401(k) Plan allows participants to contribute to a Pre-Tax or After-Tax account - also known as a Roth 401(k). The contributions made to a Pre-Tax account are NOT taxed in the year you make the contribution, but the funds are taxed at the time of distribution.
In contrast, contributions to a Roth 401(k) are taxed in the year contributed, but grow tax-free and are NOT taxed at distribution.
Generally speaking, the decision to contribute to a Pre-Tax or Roth 401(k) is straightforward for those in high or low tax brackets.
1.) If you are currently in a high tax bracket - 32% or higher - contribute to a pre-tax 401(k).
2.) If you are currently in a low tax bracket - 12% or lower - contribute to a Roth 401(k)
BUT, what about taxpayers in the middle tax brackets - 22 to 24%? Well, here is the question you need to consider: Do you plan to be in a higher or lower tax bracket when I take distributions from your 401(k)?
In most cases - and along with some planning - you can position the distribution to be in a low tax bracket.
However, there is a risk you need to consider. Yes, that risk is an unfavorable change in the tax code. Tax laws change all the time, but to differing degrees to various populations. An option to mitigate this risk is to contribute a portion to the Pre-Tax AND Roth. Since the Roth 401(k) is not taxed in future years, it will be unaffected by a change in tax code.
Of course, everyone's situation is different, but contributing to a Pre-Tax makes sense for most Plan participants in the 22 - 24% marginal tax bracket.
The Takeaway: If you are earning a Sr. Director or Vice President income, it likely makes sense to favor the Pre-Tax account option.
2: Investment Options: Individual or Retirement Date Funds?
The investment options in the Walmart 401(k) Plan can be divided into two categories: Individual Investment Funds and Retirement Date Funds.
Note: Walmart stock is not available to purchase in the 401(k) Plan, but if you hold Walmart stock in the 401(k) from previous years you are permitted to sell it.
Individual Investment Funds offer investment exposure to a specific asset class such as equity, bonds, cash and real estate. The participant selects one or more funds along with the percentage weighting of contribution to be invested in each fund. Participants are allowed to change the investments and percentage weightings throughout the year. Keep in mind that changes can take up to two pay periods to take effect.
Retirement Date Funds contain multiple Individual Funds to create a "one stop solution" to diversify contributions across asset classes. Each Retirement Date Fund is assigned a year (for example, myRetirement 2035 Fund.) The year corresponds to the year, you plan to retire. As each year passes, the Retirement Fund is invested more conservatively (i.e. more bonds and cash, less equity.) The participant does not need to pro-actively change the weighting to each asset class as they approach retirement. It is a "set it and forget it" option.
BUT Retirement Funds are mostly designed for participants that will fund retirement with solely the 401(k) and Social Security. For that reason, the funds tend to invest too conservatively for participants (such as Sr. Directors and Vice Presidents) that may supplement the 401(k) and social security with other assets such as the Walmart DCMP and brokerage accounts.
For example, a participant plans to retire in 2030 at the age of 60 and she elects to contribute to "my Retirement Fund 2030." This fund is currently invested in only 55% equity and will continue to decrease to 35% by 2030. If the participant is receiving annual distributions from the Walmart DCMP from age 60 - 70, she will not need to draw down the 401(k) until 2040. With at least a 17-year investment horizon, a 55% equity allocation is too conservative for most investors that fit this profile.
The Takeaway: If you opt for a Retirement Date Fund, consider choosing a date that is close to the year you will start distributions which is not necessarily the year you retire. In the above example, selecting the 2040 fund may be a better option - 75% Equity today.
Just for reference, here is a graph illustrating the change in allocation over time for the My Retirement Funds in the Walmart 401(k) Plan:
3: The 6% Walmart Match
In addition to your own contributions to the 401(k) Plan, Walmart makes an incremental matching contribution up to 6% of your eligible compensation after one year of employment with the Company. The Company Match vests immediately.
Let's quickly walk though how the match is calculated so that you can ensure you are receiving your full match.
There are a few components to the eligible compensation qualifier:
1.) It only includes cash compensation (Salary and MIP.) Equity Compensation (RSUs and PSUs) is excluded.
2.) The 401(k) match only applies to the first $330,000 of eligible compensation in 2023. For example, you earn $360,000 cash compensation - $260,000 of base salary and $100,000 MIP. You are only eligible to receive up to 6% of $330,000 (not 6% of $360,000.) However, you are eligible to receive a Walmart DCMP match - also 6% - for $30,000 ($360,000 - $330,000.)
3.) Contributions to the Walmart DCMP are excluded from the 401(k) match. Same example as above, but this time $60,000 is contributed to the Walmart DCMP. Your eligible cash compensation for the 401(k) match is now $300,000 ($360,000 - $60,000.) You would still be eligible for the match in the DCMP.
Reminder: As discussed in previous articles, the tax benefit of contributing to the Walmart DCMP often more than offsets the lower 401(k) match. Below are some resources on the Walmart Deferred Compensation Matching Plan:
Lastly, there is a quirk due to Walmart's Fiscal Year and the IRS's calendar year not matching. If you contribute the full $23,000 in January AFTER contributing the maximum amount in the previous year, you may lose the Walmart match. It is a little quirky, but if you keep your contributions stable - as is most common - it should not be an issue for you.
Key Takeaway: You are entitled to receive a Company match up to 6% of eligible compensation. I recommend periodically checking the Merrill site to ensure you are receiving the match each pay period.
No Mega Backdoor Roth Option
One criticism to the Walmart 401(k) Plan is that there is not a “Mega Backdoor Roth” option. Since, it is not offered I will not spend too much time on the topic. The Mega Backdoor Roth strategy allows participants to contribute more than the maximum amount to the Pre-Tax 401(k) ($22,500 in 2023), pay taxes on that income and then convert those funds to the Roth 401(k). While it would benefit some Walmart Associates, the associates that would benefit most from a Mega Backdoor Roth have access to the Walmart Deferred Compensation Matching Plan - which is pre-tax and likely a better option for those high earning associates.
Wrap-Up
We covered account type, investment options and the 6% Match. Those are the big factors in determining a successful Walmart 401(k) Plan strategy. The Plan does offer participants the ability to take out loans against the Plan and withdrawals under certain circumstances such as buying a house and growing a family.
If you are interested in scheduling a free consultation to discuss your Walmart 401(k) Plan, Deferred Compensation Plan and other benefits, please schedule time below.
Mark Chisenhall, CFA is the founder of Taurus Financial Planning, a Bentonville, AR wealth management firm specializing in helping Walmart Leaders reduce taxes, optimize investments, and accelerate retirement.
This publication is for informational purposes only and is not intended as tax, accounting or legal advice or as an offer or solicitation of an offer to buy or sell or as an endorsement of any company security fund or other securities or non securities offering. This publication should not be relied upon as the sole factor in an investment making decision. Past performance is no indication of future results. Investment in securities involves significant risk and has the potential for partial or complete loss of funds invested. It should not be assumed that any recommendations made by the Author, in the future, will be profitable or equal the performance noted in this publication.
This information is provided as a guide to assist you in your financial planning. The specific examples are provided for illustration purposes only and are not representative of specific investments or guarantees of future returns. Please consult with a professional for specific questions regarding your particular situation.
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