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Your employer may be more generous than
you think. Employer-matching contributions can really add zing to your 401(k) 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 401(k) 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 401(k) plans offer 50 cents
on the dollar up to 6 percent of salary, according to the Profit Sharing/401(k) 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 401(k) 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 401(k) plan. The matching
contributions are commonly offered for two reasons. They're an incentive to get employees
to participate in their 401(k) plan. And, the contribution vesting schedule also acts as
an employee retention tool.
While many employers are reducing 401(k) 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/401(k) 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."
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| — Ted Benna, the
creator of the first 401(k) plan and president of the 401(k) Association. |
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"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 401(k) plan and president of the 401(k) 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 401(k) 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 401(k) 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.
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| — David Wray,
president of the Profit Sharing/401(k) Council of America (PSCA). |
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"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 401(k) 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 401(k) 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 401(k) 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 401(k) 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 401(k) 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. |
