Is inflation Good or Bad for 401k and Defined Benefit Participants?

Written by Scott Emering

Headlines everywhere have been alerting us to surging prices and inflation. The consumer price index for all items rose 0.6% in January and drove annual inflation up by 7.5%.
This marked the biggest gain since February 1982 and was even higher than the Wall Street estimate. Even if you are not caught up on the news, a trip to the gas station or grocery store will very quickly bring you up to date and turn these numbers into reality. This may leave you wondering about potential negative consequences to your retirement plan.

As is often the case, the answer to that question is, “it depends.” Before we dive into the detail, let’s make sure we all understand what we’re talking about.

What is Inflation?

Inflation is defined as a general increase in prices and the fall of the purchasing power of money. That doesn’t sound particularly good and for most people, it’s really not. It’s effects on the middle class and the poor are disproportional and well documented. Our elected and appointed leaders in government, including Fed Chairman Powell, initially discounted inflationary signals as “transitory”…They are no longer using that word…

It’s Not All Bad: Impact On Qualified Plan Limits

There are some upsides to the current inflationary environment for savers and those with disposable income. Did you know that qualified plan savings limits are tied to the Consumer Price Index (CPI)? Because they are, we saw a significant increase in plan limits, and retirement savings opportunities for 2022 vs. 2021:





Individual 401(k) Limit




Individual Catch-Up Limit



No Change

Individual Aggregate Limit (includes employer contributions)




Maximum Annual Benefit in a Defined Benefit Plan




Impact on Interest Rates

The Fed, when they get around to it, will fight inflation by increasing interest rates. While this may not be pleasant for some borrowers or current bond holders, it is welcome news for savers because over the long term, bond yields should start to rise. The current projections forecast the Fed raising rates three times in 2022. The combination of rising rates and loss of purchasing power will have an overall negative impact on economic growth.

Take Advantage of the Bright Side

While inflation may not be ideal news for consumers and economic growth in general, there are some benefits for savers – increasing retirement plan savings limits and interest rates. It’s a great time to evaluate whether you can contribute more to your Plan. Or, starting a plan to benefit from the tax-advantaged savings. Remember that after the Secure Act you now have until you file your taxes for 2021, including extensions, to establish and fund a qualified plan.  RSG would be glad to help!