A 401(k) company match is free money. It’s quite simple. Employees make a contribution and the employer matches it. Sometimes the match is dollar for dollar and other times it’s less.
It really is free money, though.
So why do so many workers fail to participate in this super awesome benefit?
Free money is available through a 401(k) company match. Some employees receive tax-free contributions in excess of $10,000 per year. Why would someone forfeit such a generous benefit? I believe that there are five reasons: Complexity, YOLO, fear, ignorance, short-sightedness, and intimidation.
401(k) Company Match Participation
Less than half of the US workforce participates in an employee-sponsored retirement plan (Morning Star). Participation, in most instances, is required to obtain any financial benefit. Fewer and fewer companies offer retirement fund donations. Employee contributions result in a 401(k) company match.
Complexity — And The 401(k) Company Match
The older I get the more I realize that complexity is our enemy. Complicated situations are resisted. Conserving mental and emotional energy is in our DNA.
There is a three-step process on the tube of toothpaste in my medicine cabinet. A box of Rice-a-Roni also has a three-step process.
Apparently, that’s our limit — three steps. We really are simple creatures.
Joining a company 401(k) requires multiple steps and decisions.
Do I want to participate in the plan? Can I afford it? In which funds would I invest? What’s a mutual fund? Are bonds safe? How will this impact my taxes? Can I lose money?
It’s easy to get sidetracked with analysis paralysis. Since the water is muddy we simply reject participation.
Many companies have automated 401(k) participation. By doing so, they’ve reduced some of the perceived complexity.
YOLO — 401(k) Company Match
You only live once (YOLO) is a common phrase. Just because a phrase is repeated doesn’t mean that it’s correct.
The YOLO crowd is all about today. Why would a person sacrifice $100 today when they can celebrate with sushi and sake?
YOLO is a tough nut to crack. It’s basically a self-fulfilling prophecy.
If you’re struggling with YOLO, please realize that Father Time always wins. The future will come and it will come quickly.
My recommendation would be to contribute the smallest amount possible to get the 401(k) company match. If it’s 1% so be it. If your company does a 1oo% match and you put in $1.00 they will give you a dollar.
Plus, your taxable is reduced by your contribution.
That’s still a pretty good deal.
Fear
“Kiser, what you need to do is invest in mutual funds! Just invest $50 per month and when you’re my age you will be rich,” declared Master Chief Burgess!
Master Chief Burgess was my boss when I was in the Navy. He gave me that piece of advice way back in 1988.
What did I do? Nothing.
Why? Because I was afraid.
The stock market “crashed” in 1987. I was fully convinced that investing in stocks was the same as going to Vegas and putting money in a slot machine.
The S&P 500 closed at 271.91 on September 30, 1988. The same index topped out at 4,796 in early 2022.
I missed significant growth as I yielded to that fear.
Just think if that would have been a company 401(k) match! I would have missed, in some cases 100% gain upfront plus all of the residual gains.
Don’t let fear dissuade you from investing in your future.
Ignorance Of The 401(k) Company Match
Time is precious. Once time is gone it can’t be recaptured or recreated.
My pal Dave instructs his customers to put off investing in a 401(k) until they are completely debt-free (not the house). The question that typically pops up is, “What if I get a 401(k) company match?”
He doesn’t care. You are incapable, in his opinion, of paying down debt on a predetermined schedule and investing.
This is terrible financial advice. He arbitrarily decides when math is important and when it’s not.
Let’s say you are offered a 100% 401(k) company match. You contribute $25 and your employer matches that $25. That’s a 100% return on your investment. Historically, according to my pal, the stock market returns 12%, on average, each year (not actually true). So in this case, the return is 112%.
The average credit card interest rate is 16.17%.
Using the FPU plan, we are to willingly trade a 112% return in order to save 16.17%.
The math just doesn’t add up.
Paying down debt is important. However, being debt-free is not the same thing as generating wealth.
My wife and I began investing 1% — the minimum allowable. My employer matched it at 100%. Free money, baby. We continued to pay down our debt and slowly bumped up our investments as we felt comfortable.
There is more than one way to peel a potato.
Short-Sightedness
Ancient wisdom informs us that without vision people cast off restraint. Without financial vision, our destinies are blurred. We make short-term decisions based on a long-term situation.
The pain of today might seem unbearable. It’s hovering over your finances and it can be suffocating. Could a 401(k) contribution help your current situation?
Contributions to a 401(k) reduce your taxable income. So, yes there is some immediate reward. If your check is $100 and you contribute $5.00 you only get taxed on $95.
Start small enough where the difference in pay is not really noticed. Digest that amount and then continue to bump it up as you’re able and comfortable.
I’m sure if I asked you to trade me $5.00 for $10.00 you would do it. Or even $10 for $15. Either way, you’re ahead of the game financially.
Intimidation
Investing in the stock market can be confusing. Mutual fund companies offer hundreds of choices. Even a company-sponsored 401(k) can provide dozens of options. So man options can lead once again to analysis paralysis.
Time in the market is superior to timing the market. Even the saltiest investment sage is going to make mistakes once in a while.
Regular Joes like you have neither the time nor the financial wherewithal to analyze individual companies. We’re best sticking with mutual funds of a larger part of the market.
Getting in the market is way more important than picking the perfect funds.
There are no perfect funds.
Get in the market. Take the 401(k) company match for as much as you feel comfortable. Do some research on the funds available to you. When you feel comfortable rebalance your portfolio to match your risk appetite.
Always Take The 401(k) Company Match
Free money is free money.
Take the money!