As a Money Coach I find it difficult to believe more people don’t save for retirement. So I did an informal survey to determine why employees don’t participate in their company 401(k) plan. This is part 1 of what I learned.
First, what is a 401(k) plan? It is a retirement plan for employees. The 401(k) first appeared in 1978, and, for the most part, it has replaced the employer pension plan paid for by the company alone. The money in the plan belongs to you, so when you change jobs, you can take it with you. In a traditional 401(k), part of your salary is set aside each payday. You don’t pay tax on the contribution until retirement.
One big advantage is that some companies will match your contribution. All plans are different so you must check with your employer to find out how yours works. Here’s a simple example: you make $50,000 a year, you are allowed to contribute 10% or $5000; your employer matches up to 3% or $1500 per year. That’s $6500 a year; the $1500 from the company is “free money” and equates to a 30% rate of return on your investment. In addition your taxable income is $5000 less, a possible tax saving of $1500 (in the 30% total bracket).
So, why doesn’t everyone participate? The number one reason I hear is, “there is no company match.” Some companies provide a match no matter what. One of the people I talked to said she contributes the maximum percentage she can and her company matches $0.75 for each dollar she puts in the plan. And, if the company reaches certain goals in the year, the company doubles its match so she can receive $1500 “free money” for every $1000 she contributes. This definitely is a good 401(k) plan. Two other companies stopped their match over the past two years due to the economic situation and the company’s profit picture. Employees in these two companies should gently ask Human Resources when the match will return; HR in turn will tell senior management that employees want the match back.
“There is no company match” is a good reason not to participate in a 401(k) only if you contribute to your retirement by other means. You can put your retirement savings in a traditional Individual Retirement Account (IRA) on a pretax basis (pay tax later) or in a Roth IRA on an after tax basis (and never pay taxes again). Or you can set aside money for retirement in a regular investment account. One employee I talked to stopped contributing to 401(k) when the match stopped; instead she has an automatic deduction each month from her checking account into an IRA.
If you do participate in a 401(k) or IRA, remember to do something with the tax money you save. Don’t just let it fall into the family checking account, because it will disappear.
Next time, we will explore other excuses for not contributing to a 401(k).