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June 15, 2012 11:10 AM   Subscribe

My 401(k) has changed - any financial gurus able to explain how I am going to be affected?

My employer is transferring my job to a different company. I am allowed to keep my position, but my direct employer will be changing. As part of this transfer, my benefits package will change, and I have a question about my 401(k).

My previous employer offered 100% matching of 6% total salary, vesting after 4 years. My new employer is offering 50% matching of 6% salary, vesting immediately.

I can do some basic math here and deduct that 50% < 100%, however, I'm not entirely sure of the ramifications of the change in vesting periods, and whether or not I'm actually losing out on much. Additionally, I have received a 1.8% raise as compensation for the differences in my benefits. The change to my other benefits is negligible, so I'm assuming that this increase is mostly a result of the change to my 401(k).

I know that I'm just going to have to accept this change for what it is, considering that putting money into a 401(k) seems to have a very high ROI, even if it's only 50% versus 100%. But it would be nice to get a little perspective on my situation from someone that may know more about this than I do.

Thanks for any insight!
posted by erstwhile to Work & Money (9 answers total)
 
Depends how long you've been there, and how long you intend to stay.
posted by jon1270 at 11:13 AM on June 15, 2012


It is almost universally a good idea to contribute up to the matching limit for your 401(k). To do otherwise is to throw away free money.

The difference in compensation depends on how long you have been there or plan on being there.

Say you have already been there four years or plan on being there four years:

Your previous compensation in the form of 401(k) matching was 6% of your salary. Your new compensation is 3% of your salary (50% of 6%) plus a 1.8% raise for a total of 4.854% of your salary (since your raise allows you to contribute a bit more). In other words, they just cut your salary 1.15%. Whether 1.15% of your salary matters to you is up to you.

Say you have only been there a couple days and you plan on quitting tomorrow:

Your previous compensation in the form of 401(k) matching was 0% of your salary due to the fact that none of the matching has been vested. You now have 3% matching plus a 1.8% raise for a total salary increase of 4.854%.

You can work out the compensation change in the middle by figuring out how much of your previous matching you expect to have vested and what that compares to what you get now.
posted by saeculorum at 11:18 AM on June 15, 2012 [1 favorite]


The big question would be how long have you been there, how much have you contributed, and has the matching fully vested? Because if you've only been there two years and they are considering you no longer an employee, that means you're losing out on a portion of the contributions for the time you've already been there. (This may not be the case, of course, but I'd investigate.)
posted by restless_nomad at 11:21 AM on June 15, 2012


There's the additional minor factor of the tax consequences, since you don't pocket the entire 1.8% of your raise. Some of this is reduced by your marginal tax rate, and perhaps by FICA, depending on the size of your salary. Your employer matching contributions aren't taxable now.
posted by MoonOrb at 11:23 AM on June 15, 2012 [1 favorite]


To correct my post, MoonOrb is entirely correct - I did not include the tax implications of the 1.8% raise, since the 1.8% raise would be decreased by your marginal tax rate.
posted by saeculorum at 11:25 AM on June 15, 2012


Make sure any unvested match funds from your previous employer are going to be fully vested when the money transfers to the new employer's 401k.
posted by monotreme at 11:28 AM on June 15, 2012


If you've been there 4 years, it doesn't really matter. Since you'd have been vested either way. You might want to find out if you still have to wait to be vested in your first plan, or if you're vested right away with the change.

Continue to put only 6% into your 401(k), I like mine in an S&P indexed fund because indexed funds don't have high management fees. Also historically, the S&P returns about 10% total.

Should you feel like contributing more to your retirement, open a Roth IRA and put whatever else you like into it, also in an indexed stock fund, again SPDR is a good choice.
posted by Ruthless Bunny at 12:26 PM on June 15, 2012


Vesting is often done on a graded path, such as 25% per year. It sometimes will vest 100% after the 4 year term. Ask your new employer for a copy of the Summary Plan Description and it should describe this in clear terms.

If you can, get an arrangement between the groups so that your new employer honors your years of service with the current company. This not uncommon in a job transfer scenario. If they can do this then the whole vesting issue is solved. They may not offer this without you specifically asking for your years of service to transfer.
posted by dgran at 1:10 PM on June 15, 2012


It depends. Is it just the benefit that's changing or, since you'll basically be getting terminated from one company and hired at a new one, will you need to roll-over to a new plan?

If it's the latter, I would suggest rolling over to an IRA at a brokerage (I always recommend Fidelity) rather into your new 401(k) plan.

You new plan vest immediately which means that as soon as your employer's contributions have been made to the plan, that money is yours. Even if you get fired tomorrow, you get to roll over the entire balance. If this were not the case, you'd only get to roll over the funds that you contributed.

My bet is that you'll look like a new employee to your new company so, if you leave that company any time in the next four years, the vesting will have helped you out. If you're there for more than four years, you don't care about the difference in vesting.

Some employers that make you wait to be 100% vested in the matching funds also force you to put the matching funds into company stock until you're vested. By being vested right away, you can put the company match amount into whatever you want as soon as their contribution is made. It will likely get invested automatically in whatever your contributions normally get invested into. That's about the only advantage I can think of.
posted by VTX at 1:51 PM on June 15, 2012


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