What if I told I could get you an immediate 100% return on an investment? Would you believe me?
According to the American Benefits Council, 80 percent of full-time workers have access to a defined contribution plan such as a 401(k) or 403(b), and of those, 80 percent of those participate in the plan. That means that a little less than two thirds of full-time workers are participating in a plan.
If you’ve got a job where they offer you one of these plans, congratulations. Having access to enroll in a 401(k), 403(b), or similar product is a good opportunity.
Or at least, it can be. Sometimes these plans have really high fees just for participating. I’m not talking about fees that your investments charge you, which happens no matter what; I’m talking about plan administration fees just for having a 401(k), which is in addition to those other fees.
Even if you don’t have high 401(k) fees, your plan may not allow you to invest in the types of products that you want, like low-cost index funds. You may recall a company named Enron, whose employees had retirement plans that were heavily invested in company stock. And, well, we know how well that worked out.
And while that’s an extreme example, it’s still a good warning to make sure that you know what you’re investing in.
All that said, with the possible exception of the company stock situation, there is one case where it almost always makes sense to get on board with the company plan, regardless of fees.
And that is the company match.
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The company match, or “employer matching program” is when a company contributes to an employee’s 401(k) or equivalent plan, pursuant to the employee doing so. There are lots of ways that this can happen, but usually it is tied to how much the employee contributes up to some kind of cap.
For example, if the match is 3%, this means that the employer will match up to 3% of the employee’s gross salary. But there are other types of matches. I had a job once where I contributed 2% and my employer put in 12%, which was ridiculously titled in my favor. I wouldn’t expect anyone (myself included) to find that again.
Anyway, let’s take the 3% match scenario and see what it means. Say you make $50,000 a year, and you get paid once a month, so every month you get $4,167 (before taxes).
In order to get the full match, you would contribute 3% of $4,167, or $125 each month to your plan. (We’re assuming a pre-tax situation here, which is the simplest case.)
If you did this, your employer would also contribute $125 to your plan.
You can’t lose
This is a crazy good deal. And the best part is that it basically doesn’t matter what you choose to invest in inside the 401(k). You have gotten an immediate 100% return on your investment. You know how we’re always talking about trying to find returns in the 8-10% range? Well, you just made 100%, not 8%.
If you invested in a fund that lost money, even a lot of money, you’d still be okay. If your investment lost 25%, your match would lose 25% too, but you’d still be up 50% (which is, again, still much better than 8%). You basically can’t lose money with a company match, with the possible exception of investing in Enron stock.
Upside without much downside
It kind of blows my mind when I come across people who aren’t taking advantage of this. Granted, if you’re not used to investing, the prospect of lowering your take home pay can feel a little tough to swallow.
But what’s interesting is just how little money you give up now, and how much money you end up with.
Take our example above. When taken out of a paycheck before taxes, $125 will end up reducing one’s paycheck somewhere in the vicinity of $75.
But if you were to invest only that money for a single month (with the match), and let it sit for 30 years, it would be worth upwards of $2,500 (assuming an 8% return)! If you did this contribution every month for 10 years, in 30 years it would be worth upwards of $221,000! If you invested this amount every month for all 30 years, we’re talking almost $370,000!
There are many too-good-to-be-true deals in the investing world. But this isn’t one of them. If you have the option to get an employer match, do it. Seriously.
Do you take advantage of the employer match? If not, why not?