Company Holds Key to Increase in 401(k) Percentage Contribution

Question: I’m confused. I understand that the dollar limit for 401(k) contributions has increased. Has the percentage limit also increased? If not, the new limit applies only to really high-income people, right?

Answer: That depends on what your company decides to do with its plan.

Congress increased the dollar amount you’re allowed to contribute to your 401(k) account from $10,500 this year to $11,000 next year. But lawmakers also lifted restrictions that prevent companies from allowing employees to contribute more than about 15% of their salary each year.

Many people complained about those percentage limits, because someone making $50,000 a year, for example, could usually contribute no more than $7,500 to a 401(k)--even though the dollar limit allowed by law was higher.

Now that the law has changed, starting next year employers can allow you to contribute much more of your salary--theoretically as much as 100% of your pay, if you make $11,000 or less, said Richard O’Donnell at RIA, a New York-based provider of tax information and software to accountants and professionals.

Companies, however, aren’t required to change their plans and increase their percentage limits. If you and your co-workers want to contribute more, you should start lobbying your employer.

The benefit of such a change would go mostly to lower-paid workers. Higher-paid employees probably would run into another limit that’s intended to prevent plans from giving them disproportionate benefits.

The amounts these highly compensated employees are allowed to contribute depends in large part on how much lower-paid workers are paying into the plan. If there’s too little participation by those lower on the totem pole, then higher-paid employees might not be able to contribute the full percentage allowed other employees. The rules defining who’s highly compensated can vary, but generally workers with salaries over $85,000 are the ones who run into this problem.

Living Will, Power of Attorney Necessary

Question: I recently read that everyone 18 and older needs four documents: a will, a living will, a power of attorney for finances and a power of attorney for health care. My husband and I would like to complete these documents ourselves to save money. Where do we get them? Would they hold up without having a lawyer fill them out?

Answer: Actually, not everyone needs a will. If you don’t have minor children or much property, and you don’t care what happens to your stuff after you die, you probably don’t need to draw up a will.

Those other documents, however, are must-haves for almost everyone, because they allow someone else to make decisions for you should you become incapacitated.

Nolo Press has long published excellent books, kits and software to help you prepare your own estate planning documents. If your assets are few, your finances simple and your family relations warm, Nolo’s do-it-yourself materials may be sufficient.

But Nolo warns that you’ll need a lawyer’s help if you have enough assets to worry about estate taxes (currently, that’s more than $675,000), or if you have a fractious family that may not lovingly carry out your wishes.

By all means, get started with the books (“Plan Your Estate” or “The Quick and Legal Will Book”) or the software (Quicken Family Lawyer 2002) rather than continuing to procrastinate. Even if you later need to consult a lawyer, you can use these tools to help you organize your thoughts and create a first draft you can take to your attorney as a discussion starter. Should disaster strike before that consultation, at least you’ll have something in place.

Good to Keep Tabs on Insurance Firms

Question: We have a fixed annuity with a large insurance company that has recently reported declining profit because of fewer annuity sales. I’m concerned about the company’s financial well-being and wondering whether we should switch our money to another insurer.

Answer: It would take more than a few quarters of declining profit to hurt the financial standing of most large insurers. Even the effect of the Sept. 11 terrorist attacks isn’t expected to drive any major companies into insolvency.

Still, it’s smart to keep tabs on the strength of your insurance company, particularly when you’ve entrusted them with your hard-earned money.

You can check with A.M. Best or Standard & Poor’s to see how these rating agencies assess your insurer. You can access the ratings on the Internet at https://www.am best.com or https://www.standardand poors.com, or check with your local library, which probably subscribes to one or both rating agency publications.

For a more detailed analysis, consider paying for a report from Weiss Ratings, an independent rating agency that’s often a bit tougher on the companies than its competitors. You can access Weiss reports for $7.95 each at https://www.weissratings.com or for $15 by calling (800) 289-9222.

*

Liz Pulliam Weston is a personal finance writer for The Times and a graduate of the personal financial planning certificate program at UC Irvine. Send questions to moneytalk@latimes.com or mail to Money Talk, Business Section, Los Angeles Times, 202 W. 1st St., Los Angeles, CA 90012. .