Why Some Company Matches Fail to Match Your Objectives

Just because there is a company match doesn't make it the match you should take.

We know about diversity.  We know about spreading the risk.  We know that we are supposed to be investors, eyeballing retirement. We should know better. Why then, do we continue to take the offering of the company's stock in our 401(k)?

There are several reasons.  First of which is how your company’s 401(k) plan in structured. When an employee becomes eligible to begin investing in the plan, they often find that the company match, the funds the company invests with you, up to a certain percentage, is often only offered in the company’s stock.  And because we are always suggesting that the employee take the company match, at the very least, they take our advice and begin to load up their portfolio with shares of their employer.

Often, when this sort of offering is available, it is one of the few buy-and-hold restrictions in the plan.  That means that if the fortunes of your company drop, for whatever reason – poor quarterly earnings, lackluster forecasts or simply a cyclical turn of events, the employee must ride out the downturn. This can be a big deal if the employee is long-term and because of that, has a huge chunk of their retirement tied up in that stock.

More on owning stock in your company.

Paul Petillo is the Managing Editor of Target2025.com

Retirement Planning: Vacation Time and No Money?

We have found that 2009 was not so kind to those investing in their 401(k). Employers have reduced or eliminated their matching contribution and many recent surveys have suggested that this will be slow to return. What was once considered the competitive lure for many employees has no simply become a sidebar in the search for a job. For many, and employers know this all too well, just landing employment is benefit enough.

But what about those who already have a job? What if you are a long-term employee? Many of us, as we have noted numerous times in this blog (post about matchless strategies) and on BlueCollarDollar.com, have taken the wrong path when confronted with this issue. Far too many of us reduced our contribution to our defined contribution plans when this occurred. Some have even determined that if the employer doesn't match, you shouldn't contribute either. And just as bad for your retirement future, you did nothing to help make up for that plan shortfall.

As we have noted, the best way to make up for this decrease in contribution is to increase the one you are making. For older workers, the higher salary they receive may make this possible. For younger workers, the decision becomes one of increased frugality, living well within their means and doing without some of the luxuries they may have built into their budget. If your employer contributed 3% and you contributed enough to make the match effective, your best move is to make up for the employer's shortfall.

Yet, there may be another way that your employer might be willing to allow. In an effort to get more people contributing more to these all-important accounts, the Obama administration has allowed retirement investors the option of rolling unused vacation pay or accrued sick pay into their plans.

This past year may have seen an increased workload at your job because of employee cut-backs. This may have forced you to defer a much needed vacation in favor of staying right where you were. Fear of seeming dispensable at a critical time, even though the need for vacation has been proven the best way to increase productivity. But this leaves you with an account full of unused vacation time.

Contributing this sort of payment to your 401(k) requires your employer to make some changes to their plan. Even as some have reduced the availability of their matching contributions, some have added this provision to their plans to allow exiting employees to have their unpaid time put into their 401(k) plan prior to rollovers and to allow those who did not use what they had, to use the time to contribute to existing accounts. The later can only be done if you have not maxed out your account (currently at $16,500 for those under 50 and $20,000 for those over that age).

Companies may find this incentive very alluring. Not only does it make them slightly more competitive (for one, employees are on the job more throughout the year) but it offer the illusion of a benefit increase without the actual pay increase.

If your company currently does offer this or is considering it, keep in mind that it will not come with or apply to any matching benefits the company offers. And they may also see it as a temporary offering rather than a fixed part of the plan. The only thing that is certain is the option must be nondiscriminatory.

Matchless Strategies

For many us, the employer match to our 401(k) plans has gone, or in some cases reduced to a mere shadow of its former generosity. They are expected to return but it will take years before they return to their former levels - if they ever do.

This presents the person planning for retirement (perhaps predicting a retirement income would be a better description) with a dilemma. They are at first troubled by their own human nature.

Many of us have never made the attempt to increase our contribution to make up for the shortfall. Few of us max out these accounts, relying in the employer's match to give us three, possibly more, percentage points of pre-tax income contribution. If your employer stopped putting 3% (of free money) into your account, you risk missing your projections by up to $100,000 over a thirty year career.

To make up for this shortfall, we will need to increase our contribution by at least this much. In the short-term, this will mean taking home less. If your partner has a plan that continues to match, be sure they are contributing enough to receive it.

One or both of you could make up the increase by dividing the increased contribution. This might have a less of an impact on your take home pay.

This can also be done gradually, increasing your contrbution as you receive pay raises or bonuses (using them to offset any yearly income decrease as a result of your increased contribution). But it shouldn't be ignored.

This might also mean adopting increased exposure to more risky investment strategies. Many people are using a far-too conservative approach to their investments for retirement and often too soon. As I said "more risky". Adding a more aggressive fund or two and using the increased contribution to fund it might be the best option to recovering that lost ground quicker. Not always but in the long-term, it might be a risk worth considering.

And while you are making sacrifices, something that everyone seems resigned to do, start getting your financial house in order. A pay decrease shouldn't extend your credit balances on penny. In fact, a little austerity now could go a long way just ten-years down the road. Prepare your entire liability plan to be eliminated by the time you retire. A 30-year mortgage with fifteen viable work years left spells trouble in retirement.

I'm not saying there won't be debt scenarios that are unavoidable, but a mortgage shouldn't be one of them - and neither should outstanding credit debt. With no clear and concise picture of the cost of health care, the ability of Social Security to pay you what you think you have coming, and the performance of that 401(k) as you near retirement, carrying debt in light of this cloudy future can be the storm you were unprepared to deal with.

Can You see What They See?

It Should be Easier
There are numerous obstacles that keep us from building enough wealth in our 401(k) plans. The first is as simple as beginning to invest in your retirement future. This is stressed frequently and with good reason. The earlier you begin investing, the better situated you will be for retirement in the far-off future.

The second hurdle is how much to invest. I suggests that no matter how poorly a plan you have with your employer, setting at least 5% of your pre-tax income (a number that does not have much of an impact on your take-home pay) is better than not investing at all. For first time 401(k) investors, who may need as much of their paycheck as possible, this is a good start.

The third hurdle is the company match. This is used as an incentive to get you to put some money away for your future by offering to match the first couple of percentage points. Some companies do not do right by their employees when they match only with their own company's stock or if they have lowered or withdrawn the match due to the "economic downturn".

And the last hurdle to these beginners is where to put their money. Not all plans are created equal and not all investments in these plans are worthwhile. That doesn't mean you should ignore the opportunity to invest, it simply means that your choices are not as good as they could be. This is particularly troubling if you are an older investor who may have gotten a late start or if you have changed jobs and are now enrolled in a less than adequate plan.

Finish reading this post here.