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Your employer may be more generous
than you think. Employer-matching contributions can really add
zing to your 401k account. That is, if you are patient enough to
become fully vested.
Financial planners recommend that you
should always contribute enough to get a full match, and you should
do some serious matching-contribution number crunching when thinking
about job-hopping.
More by accident than by design, I've
managed to vest in two different employers' retirement plans. That
happenstance is a leading reason I've managed to build, in the last
10 years, a 401k balance valued in the upper five digits.
I'm a journalist by trade, which
means I'm no stranger to low salaries and changing jobs every few
years.
Sure, the 1990s bull market helped
build my balance, but I'd be working from a much smaller base if I
hadn't had that employer help. It was when I got my
employer-matching contributions that my balance really popped.
The lesson I take from my experience:
I'll think twice before quickly hopping jobs and losing an
employer-matching contribution.
There Are Free Lunches
Many times, employees don't think
employer-matching contributions are worth much — the largest
percentage of 401k plans offer 50 cents on the dollar up to 6
percent of salary, according to the Profit Sharing/401k Council of
America (PSCA). What many fail to realize is that a $4,000 matching
contribution balance built up in their 30s could be worth $100,000
by retirement, says Karen Burnham, assistant vice president of
retirement financial services for Delaware Investments.
Across the board, financial planners
agree that employees should always (and they don't throw that term
around loosely) contribute at least enough into their 401k to
receive the full employer-matching contribution. Regardless of your
retirement savings goals, if you're not getting the match, you are
losing out on free money.
The Employer Perspective
A majority of employers offer some
kind of matching contribution to the employees that participate in
their 401k plan. The matching contributions are commonly offered
for two reasons. They're an incentive to get employees to
participate in their 401k plan. And, the contribution vesting
schedule also acts as an employee retention tool.
While many employers are reducing
401k enrollment eligibility times (the amount of time a new
employee has to wait to begin participating in a 401[k]), few are
reducing the vesting periods, said David Wray, president of the
Profit Sharing/401k Council of America. A small number offer
immediate vesting.
One popular matching program is a 50
percent employer match that vests in five years, a 1998 survey of
compensation and benefits by consulting firm KPMG Peat Marwick L.L.P.
said.
Yet, some retirement professionals
say that a five-year commitment is a lot to expect in this job
market.
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| "You
can potentially think of being at some place for
three years. Five years is a stretch for some
people." |
| — Ted
Benna, the creator of the first 401k plan and
president of the 401k Association. |
|
"You can potentially think of
being at some place for three years. Five years is a stretch for
some people," said Ted Benna, the creator of the first 401k
plan and president of the 401k Association.
Still, vesting periods "do keep
people (on the job) that extra time," Wray said.
Burnham suggests a shorter vesting
period would be more popular with employees. She proposes that
employers adopt a three-year graded vesting program. "I've seen
one plan do that," she said.
Indeed, Congress is currently
considering legislation that would shorten 401k vesting periods.
Currently, employers using a cliff vesting schedule must have their
plans vest in five years. Congress proposed shortening that to
three. For employers who use graded vesting schedules, the plan is
currently required to vest in seven years, but this could be
shortened to six years.
Value of Match
Workers looking at a new job with a
juicy salary may think they can make up the lost employer
contributions. But, that's erroneous thinking, says Kay Shirley,
certified financial planner and author of Live Long and Profit.
It's hard to make up the time that an
employer-matching contribution sits in a vesting account steadily
building up compound interest.
Here's an example of what your match
could be worth.
Say the day you start a new job, you
can immediately invest in the company 401k plan. You contribute
$2,000 a year into the plan, and your employer offers a
50-cents-on-the-dollar match, or $1,000 a year. Suppose it takes
four years for those contributions to vest. Again, let's assume a 10
percent rate of return. Over that four-year period, the value of
your employer-matching contribution would be $4,641.
The important thing to do if you have
a job offer in front of you is to sit down and run the numbers
yourself, says Benna. "You should think ... what are you giving
up if you change (jobs)?" he said.
No Simple Solution
Of course, your decision may not
always be cut-and-dried. You have to make a decision that's best for
your individual circumstances.
For instance, you may need to get out
of a hostile work environment. You may need a job offering a higher
salary. Your spouse may be taking a job in a new city.
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| "If
you are going to keep yourself on track, ... you
need to make higher contributions to make up"
for a lost employer match. |
| —
David Wray, president of the Profit Sharing/401k
Council of America (PSCA). |
|
"It comes down to pros and
cons," said Alex Hannah, account manager, employee education
with American Express Retirement Services. "Do you hate your
job that much?"
Theresa Kwayi, 31, recounts taking a
pass on some employer-matching funds. She's the manager of
retirement programs for Millennium Chemicals Inc., and is
well-schooled in the value of matching contributions. With two and a
half years of service at the job, she needed another two and a half
years until the five-year cliff vesting period for employer-
matching contributions expired in her 401k account.
But, she decided that she wasn't
progressing enough at her job. She found a new job with an employer
that offered a graded vesting plan.
Then a few months ago, her husband
got a new job in a new town. Kwayi took the $5,000 she had saved in
her 401k plan and used it as the down payment for a new house. She
admits that by draining her account, she was giving up five years of
interest compounding on her money. But, it was worth it. "We
didn't want a huge mortgage," she said.
The bonus: She got a $20,000-a-year
salary increase at her new job and her new employer offered
immediate enrollment in her 401k plan, as well as immediate
vesting of her matching contribution.
While she did well, Kwayi tells the
story of a former co-worker who decided to stick with a job just to
get the match. "She waited a year and half. She got her
pension, $3,500. But, she wasn't happy (with her job)," Kwayi
said.
The lesson: You often can't look at
this issue in a vacuum.
Get Back on Track
If you're a job hopper, you might be
able to make up a lost matching contribution. But, it can be
difficult. Many folks don't have the willingness or discipline to do
so.
You have two strikes against you. You
need to make up for both the base contribution, but also the
appreciation on that contribution. Every time you make a
contribution into your 401k plan, your employer must make a
contribution as well. Those contributions are invested in the same
investments as you chose for your own contributions, even though
that money may not yet be yours.
When trying to make up a lost
employer match, you're working against time, which is a saver's
biggest ally.
An extra thousand here or there can
make a big difference down the road. Suppose you saved $2,000 at age
25 in your 401k plan. By age 65, assuming a 10 percent return,
that money would have grown to $90,519. But, suppose you waited
until age 45 to save that $2,000. By age 65, that money would only
have grown to $13,455.
And, if your employer offered a
50-cents-on-the-dollar match, the $3,000 (the $2,000 you contribute
plus the $1,000 employer match) you could save at age 25 would reach
$135,778, also assuming a 10 percent return.
Kwayi recognized the need to get back
on track quickly and is well on her way to making up for lost time.
Her strategy: "I contribute more
than the amount required to get a match," she said.
She expects to make up the full
$5,000 she drained from her account in another year.
One of the biggest obstacles to
making up for a lost employer-matching contribution is a long
enrollment period. If your employer makes you wait a year or more to
enroll in your plan, you've lost momentum.
"If you are going to keep
yourself on track, ... you need to make higher contributions to make
up" for a lost employer match, Wray said.
You could open an IRA, or try to
negotiate with a new employer to compensate you for a lost
employer-matching contribution, Wray said.
If you're only a month or two away
from being vested, see if your new employer is willing to delay your
offer and start date, so you can have time to vest.
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