Employer matching of retirement savings
July 31, 2012 10:28 PM Subscribe
If an employer offers 100% match on retirement investing up to a certain percent of salary, and then 50% on a certain percentage above that, does it make economic sense to invest all the way through the 50% match, or stop with the 100% match and invest the rest somewhere else?
Do you know some magical investment that is going to return you more than 50% within a certain short period of time with relatively low risk? If so, then sure, why not. Otherwise, this seems like a no-brainer.
posted by gracedissolved at 10:32 PM on July 31, 2012 [19 favorites]
posted by gracedissolved at 10:32 PM on July 31, 2012 [19 favorites]
Without the snark: Yes, it makes economic sense.
posted by Nightman at 10:37 PM on July 31, 2012 [5 favorites]
posted by Nightman at 10:37 PM on July 31, 2012 [5 favorites]
Mod note: Comment deleted; helpful answers, please.
posted by taz (staff) at 10:55 PM on July 31, 2012
posted by taz (staff) at 10:55 PM on July 31, 2012
Yes, unless you have debt that you have to service where not doing so will prevent you from keeping this position that is doing this thing for you.
posted by porpoise at 11:26 PM on July 31, 2012 [1 favorite]
posted by porpoise at 11:26 PM on July 31, 2012 [1 favorite]
There's not a single answer, my advice is to consider the following:
1) How close you are to retirement
2) How well the investment will do
3) What else you can spend that money on
At my last job I was putting in up to the 100% match but saw the investment yields were disappointing (in fact they were heading towards the negative). I could have been using the money I was investing in retirement towards my school debt. With retirement quite a long way away, I decided to reduce the amount I was contributing.
However - it seems like you will just "invest" the extra money anyway? If you're definitely planning to use it only for retirement, I would go with your employer's option. But if you are a ways from retirement and think you might want to get that investment back before retirement, perhaps look somewhere else.
posted by Lt. Bunny Wigglesworth at 11:54 PM on July 31, 2012
1) How close you are to retirement
2) How well the investment will do
3) What else you can spend that money on
At my last job I was putting in up to the 100% match but saw the investment yields were disappointing (in fact they were heading towards the negative). I could have been using the money I was investing in retirement towards my school debt. With retirement quite a long way away, I decided to reduce the amount I was contributing.
However - it seems like you will just "invest" the extra money anyway? If you're definitely planning to use it only for retirement, I would go with your employer's option. But if you are a ways from retirement and think you might want to get that investment back before retirement, perhaps look somewhere else.
posted by Lt. Bunny Wigglesworth at 11:54 PM on July 31, 2012
About 10 years ago I worked for a company that did something similar, and I thought it was the best idea to take advantage of. However, one of the accountant for the company, who was in our food group, said he did not participate at all the company investment opportunities. I never understood that, though I surmise in some fashion that you only have to beat the company's selection of funds, not the entire amount, since as I figure it the company funds could lose more than you do on your own. Certainly skill is a factor here!
On preview, along the lines of Lt. Wigglesworth here.
posted by rhizome at 11:57 PM on July 31, 2012
On preview, along the lines of Lt. Wigglesworth here.
posted by rhizome at 11:57 PM on July 31, 2012
Will all your 'eggs be in one basket'? Is it wise to have no diversity? What if you change jobs? What happens to your investment.What happens if your company closes?
posted by Cranberry at 12:22 AM on August 1, 2012
posted by Cranberry at 12:22 AM on August 1, 2012
Another thing to consider is how your investments are being matched.. I have flexibility and options in my company 401k plan, but my company only matches with company stock... which frankly, hasn't been the greatest investment.
posted by j03 at 1:53 AM on August 1, 2012
posted by j03 at 1:53 AM on August 1, 2012
You would be turning down free money by NOT investing up to get the max amount of match from your employer. Say you put in $100, with the lower tier match from your firm, blam! $150! Instantly! Even if the investment loses 25% of it's value, you've still got $112.50. j03 has a good point though, if the match is ALL company stock (as opposed to a diversified 401k), then you should look carefully at the stock before you invest.
Granted, if you could find an investment that made over the reduced amount (50% in this case) then yes, you would be better off investing there. But if you believe someone can reliably get you 50% return, then boy have I got the investment for you!
posted by Grither at 3:42 AM on August 1, 2012 [5 favorites]
Granted, if you could find an investment that made over the reduced amount (50% in this case) then yes, you would be better off investing there. But if you believe someone can reliably get you 50% return, then boy have I got the investment for you!
posted by Grither at 3:42 AM on August 1, 2012 [5 favorites]
The only reason I wouldn't invest to the maximum match (even if it's 50% or less) is if I think the investing is going to do so poorly that the match will be (or almost be) wiped out. For example, if they match 35%, but I think it is going to lose one third the value (e.g., I'm not getting a diversified 401k, but rather some other security or securities that I know will tank), I'm only getting 90% of what I'm investing. If I could stick it in the bank and break even, I'd be at 100%. If I could invest elsewhere and get 5%, I'd be at 105%.
On the other hand, if they match 35% but I think my 401k is going to go down 10%, I'd be at 112.5% still, ahead of my "sure 5%".
Even if you have debt at 3% (car loan), 5% (student loan), 10% (credit card), if you're getting a 50% return on your money and have no problems otherwise paying down your debt, I would continue to take advantage of the matching. $5000 of student loan debt will pile up to $5250. Meanwhile, a $5000 in 401k contributions will be (assuming your securities do not change in value) $7500. In this case, it's worth paying $250 in student loan interest to wind up $2500 richer in your 401k.
posted by Brian Puccio at 4:17 AM on August 1, 2012 [2 favorites]
On the other hand, if they match 35% but I think my 401k is going to go down 10%, I'd be at 112.5% still, ahead of my "sure 5%".
Even if you have debt at 3% (car loan), 5% (student loan), 10% (credit card), if you're getting a 50% return on your money and have no problems otherwise paying down your debt, I would continue to take advantage of the matching. $5000 of student loan debt will pile up to $5250. Meanwhile, a $5000 in 401k contributions will be (assuming your securities do not change in value) $7500. In this case, it's worth paying $250 in student loan interest to wind up $2500 richer in your 401k.
posted by Brian Puccio at 4:17 AM on August 1, 2012 [2 favorites]
The 50% match funds would have to be invested in something really horrible for it to not be your best course of action. The only other concern may be if you haven't established an emergency savings fund or other financially sensible solutions, but almost always investing at least to the match point is the best bet.
posted by dgran at 5:36 AM on August 1, 2012
posted by dgran at 5:36 AM on August 1, 2012
I agree, go for the company's matching fund. They're giving you money! Even if they invest in something that loses 33%, you'd at the very least be breaking even, and in fact somewhat ahead, due to the tax advantage. My own employer does not match one single penny, and I'm extremely envious of folks with company matching funds!
posted by RRgal at 6:09 AM on August 1, 2012
posted by RRgal at 6:09 AM on August 1, 2012
There are a lot of people assuming that the company makes the investment choices. That's not necessarily true. I've worked at a place with a similar plan (for 401k), with a brokerage (Fidelity or Vanguard, I forget which) where employees choose which funds the money is invested in.
posted by ShooBoo at 6:53 AM on August 1, 2012 [2 favorites]
posted by ShooBoo at 6:53 AM on August 1, 2012 [2 favorites]
I don't think it's too complicated.
1. Leave aside the 100% match because it's irrelevant to your question.
2. Just look at the 50% match. That means if you put in $100, the company puts in $50.
3. So presto: You've earned a 50 percent return on your investment.
It's hard to argue against an investment that returns that much. The only arguments I can think of are 1) you have abolutely NO choice in how the money is invested or 2) you have a financial crisis so big that you you must pass up a 50 percent reutrn.
ShooBoo is right. Most 401k plans give you substantial choice.
posted by LonnieK at 8:00 AM on August 1, 2012 [2 favorites]
1. Leave aside the 100% match because it's irrelevant to your question.
2. Just look at the 50% match. That means if you put in $100, the company puts in $50.
3. So presto: You've earned a 50 percent return on your investment.
It's hard to argue against an investment that returns that much. The only arguments I can think of are 1) you have abolutely NO choice in how the money is invested or 2) you have a financial crisis so big that you you must pass up a 50 percent reutrn.
ShooBoo is right. Most 401k plans give you substantial choice.
posted by LonnieK at 8:00 AM on August 1, 2012 [2 favorites]
There are some employers that will allow you to do what's called an "in-service roll-over" where you can roll your 401k over to a Traditional IRA while you're still working there (rather than having to wait until you leave the company, retire, etc). If you could do this (be careful about what happens with the matching funds) you'd be getting the best of both worlds by getting the company match in your 401k and then rolling some or all of the funds into an IRA where you have more control and investment options.
It's pretty rare and you might not be able to do it until you're 100% vested in the match (or you might not have to leave the matching funds in the 401k or something) but it would let you have your cake and eat it too.
It's pretty rare though. In any case, yes, get the match, even at 50% it's an instant 50% return.
posted by VTX at 8:05 AM on August 1, 2012
It's pretty rare and you might not be able to do it until you're 100% vested in the match (or you might not have to leave the matching funds in the 401k or something) but it would let you have your cake and eat it too.
It's pretty rare though. In any case, yes, get the match, even at 50% it's an instant 50% return.
posted by VTX at 8:05 AM on August 1, 2012
One other advantage to consider, is that your contribution might be tax deferred (as is the case in the Federal TSP). If that is the case, your contribution is deducted from your gross income pre-tax, lowering your taxable income and potentially your tax rate. If you have a tax deferred contribution plan and you do not take the 50% matching funds, you are not only missing out on the employer matching funds, you are also paying taxes on that money. Meaning you have less capital for an initial private investment than you would investing the same percentage of gross income through your employer's plan.
posted by chrisulonic at 8:23 AM on August 1, 2012
posted by chrisulonic at 8:23 AM on August 1, 2012
Another consideration I don't see mentioned is vesting - is the company match immediately vested, or does it have a vesting schedule? If the latter, do you plan on being with the company long enough for their match to vest? If no, then you might want to consider investing elsewhere, with all the caveats mentioned above.
posted by namewithoutwords at 8:24 AM on August 1, 2012
posted by namewithoutwords at 8:24 AM on August 1, 2012
A fee-only financial planner will likely charge you $400 to $800 for a detailed review of all your investment strategies.
posted by Sidhedevil at 9:09 AM on August 1, 2012
posted by Sidhedevil at 9:09 AM on August 1, 2012
Think about it this way: a 50% match means that you earn 50% on your investment immediately (so you also have the benefit of compounding that 50% for the longest possible period of time).
For this not to be the best investment possible, you would have to be invested in something pretty crappy indeed.
Take both matches; enjoy retirement!
posted by 3491again at 11:19 AM on August 1, 2012
For this not to be the best investment possible, you would have to be invested in something pretty crappy indeed.
Take both matches; enjoy retirement!
posted by 3491again at 11:19 AM on August 1, 2012
The big consideration in any long term investment is how much gets skimmed off in management charges, if we ignore tax, inflation and capital gains and just subtract 2% every year for 40 years, you will get this result:
100
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If the annual charge was 1% instead of 2% per annum then that final figure would be 68
So if the comparison is investing in a scheme charging 2% but with 50% uplift versus investing the money yourself with management charges of only 1%
45 + 50% = 67.5
posted by Lanark at 11:23 AM on August 1, 2012
100
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49
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45
If the annual charge was 1% instead of 2% per annum then that final figure would be 68
So if the comparison is investing in a scheme charging 2% but with 50% uplift versus investing the money yourself with management charges of only 1%
45 + 50% = 67.5
posted by Lanark at 11:23 AM on August 1, 2012
If I understand correctly, the company is matching to some extent your purchase of their stocks. If that's the case, there are two gotchas that you should be aware of:
1. The company-matched part is probably not vested right away, which means that although you have a right to the stocks you bought, you can't do anything with them for a set period of time (until you are 'vested'). IIRC, at the last place I worked it was two years. If you leave the company, you lose the non-vested stocks.
2. You're stuck investing in that company's stock, which is not so bad if you're diversified elsewhere, but it concentrating your risk. Imagine the company starts tanking -- you might lose your job, and your investments are also losing value. The downside risk is therefore magnified. (Of course, it works on the upside too.)
It's not a bad idea, but you need to be aware so you can adjust your purchase timings and other investments.
posted by Simon Barclay at 7:07 PM on August 1, 2012
1. The company-matched part is probably not vested right away, which means that although you have a right to the stocks you bought, you can't do anything with them for a set period of time (until you are 'vested'). IIRC, at the last place I worked it was two years. If you leave the company, you lose the non-vested stocks.
2. You're stuck investing in that company's stock, which is not so bad if you're diversified elsewhere, but it concentrating your risk. Imagine the company starts tanking -- you might lose your job, and your investments are also losing value. The downside risk is therefore magnified. (Of course, it works on the upside too.)
It's not a bad idea, but you need to be aware so you can adjust your purchase timings and other investments.
posted by Simon Barclay at 7:07 PM on August 1, 2012
This thread is closed to new comments.
posted by dfriedman at 10:30 PM on July 31, 2012 [1 favorite]