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Is it worth contributing to my company's 401k plan if they don't match?

Are there better investment choices instead?

Jan 04, 2012 by Tyler from La Jolla, CA in  |  Flag
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11 votes

In most cases, my answer would be "no", but as usual that answer comes with some caveats. The following is what I believe is the order in which one should invest their excess cash flow. First, contribute to your 401K plan to the level where any company match is maximized. For example, if your company matches 50 cents for every dollar you invest up to 6%, contribute 6% and take advantage of the "free money" from the company.

If there is no match at all, the first place to invest your excess cash flow should be the paying off of any debts outside your mortgage. And if your mortgage is higher than 5% definitely investigate refinancing it at a lower interest rate - just don't increase the time frame over when this debt will be paid off in order to truly achieve savings on your interest expense.

The next step is to have at least 3 months of your normal monthly expenses in a savings or money market account. Have more than 3 months here if you feel finding another job at your current income level might take longer than 3 months. Do the math.

Once these steps are achieved, it is time to invest in the Roth IRA. This is especially true if you also have college expenses in your future, as you can withdraw from the Roth IRA tax free and without any tax or penalty (including the 10% you would normally have to pay if you are under 59.5 years old) for qualified higher education expenses, plus retirement account assets will not count against you on your expected family contribution number under FAFSA so that is potentially another rarely mentioned advantage to the Roth contribution. Your Roth will have to have been established for 5 years in order to recognize these benefits. If your income is too high to contribute to a Roth you can contribute to a traditional IRA instead and simply convert it to a Roth as a way to get around the income restriction, but we don't know for how long that will remain an option (depends on whether or not congress will continue to allow that "loophole" in future years).

After fully funding your Roth (and your spouse's if you are married) this is the time you can invest more dollars in your 401K. But this also assumes it is money you can "afford" to put away until retirement, and that all necessary "asset protection" through insurance products are being funded, including life insurance, are being funded. We find that many individuals knowledge of what are appropriate insurance products, including products they may already be funding, is far from adequate, so be careful here.

I may have given more information than you cared to hear, but in my opinion it was necessary. We always welcome the opinions of other qualified professionals such as CPA's and estate tax attorneys, and knowledgeable friends or family members, to weigh in on our suggestions. Have a blessed day.

Bob Miller, Principal, Heartland Financial Strategists, Peoria IL 800-715-4435

3 Comments   |  Flag   |  Jan 04, 2012 from Peoria, IL

Wow, that was a very helpful answer! Thanks!

Flag |  Jan 05, 2012 near La Jolla, CA

Agreed. Thanks Bob.

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Flag |  Feb 09, 2012 near San Diego, CA

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Flag |  Jun 02, 2014 near Manhattan, NY

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7 votes
Sarah Gronvold Level 8

My opinion is "yes." However, the answer really depends on several factors. If you’re looking to maximize your tax deduction for 2012, you can contribute up to $17,000 in pre-tax 401k deferrals if you’re under age 50. If you turn age 50 or older during 2012, you may contribute up to $22,500 in pre-tax 401k deferrals, provided your 401k Plan permits catch-up contributions. Whereas with an IRA, the most you can defer in tax-deductible contributions is $5,000 if you’re under age 50, or $6,000 if you turn age 50 or older during 2012.
Beyond consideration of the contribution limits, it is important to factor in the overall costs of each. Often, the investment options and fees are more attractive than in an Individual Retirement Account (IRA). Mutual Funds may not enforce minimum investment requirements to 401(k) Plans that they would otherwise enforce in an IRA. You also sometimes gain access to better mutual fund share classes in a 401k Plan. Additionally, if the 401(k) plan is operated by a fee-for-service provider, there is a strong chance that a portion of the expenses would be paid by the plan sponsor, which, while not as enticing as a match, could definitely be to the benefit of an individual looking to put away some pre-tax dollars.

Comment   |  Flag   |  Jun 11, 2012 from Jacksonville, FL

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Tyler I agree that Bob's answer was excellent and depending upon the circumstances I would agree with him in many cases. Let me offer an alternative view, however. If your company's plan is decent or better I might suggest that you focus on contributing as much as you can afford to it. This assumes no debt issues as Bob mentions above. My rational is that contributing to a retirement plan automatically via payroll deferral is one of the easiest and most painless ways to accumulated retirement savings. If you work for a larger company the plan may well be low cost with a selection of index funds. Also perhaps your plan offers a Roth 401(k) option which would allow you to contribute more you could to a Roth IRA. Where I'm coming from is that many studies have shown that the biggest determinant in a successful retirement is the amount saved. Match or no match a 401(k) generally allows you to save the most money. Obviously this can't be looked at in a vacuum, but I generally advise most clients to max out their contributions to the extent feasible.

Comment   |  Flag   |  May 21, 2012 from Arlington Heights, IL

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Allan Henriques Level 18

That’s a difficult question to answer without having specific information about your company’s 401(k) plan. In general, while having an employer-sponsored retirement plan is great, it’s even better if it comes with matching contributions. However, even without matching contributions, 401(k)s offer certain advantages, such as automatic deferrals and tax-deferred savings.

If your company doesn’t offer 401(k) matching contributions, you’ll really need to sit down and look at the details of the employer-sponsored plan and compare it with your other retirement saving options, such as contributing to an IRA. You’ll also need to think about your other financial obligations and long-term goals. To help you make the best possible investment decision, it might be smart to sit down with an experienced financial planner who can help explain the different options and how each will impact your overall financial situation and your ability to reach your retirement goals.

A key factor to keep in mind – and one that most employees overlook, is the amount they should be saving (whether it’s in or out of your company 401k plan). Studies consistently show that in order to have a retirement in which they maintain their standard of living – most employees need to be saving 10% - 15% of their earnings annually during their working years.

Comment   |  Flag   |  May 30, 2012 from Rocklin, CA

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One of the biggest determining factors as to whether or not you should contribute with no matching is the quality of the investment menu and the cost of the plan to you as a participant. Often, Employer Retirement Plans are actually some of the most expensive investments in the market place. While this is not always the case; it is the case all too often. If your particular plan's total assets (not just your account, but everyone's in the plan) are over $1 million, then you should have access to an average cost of not more than about 1% to 1.25% per year for actively managed choices. If the costs are higher than that, chances are your 401(k) plan is being overcharged from the service providers. This fee disclosure information should be readily available from your plan provider and your employer.

Comment   |  Flag   |  Jul 03, 2012 from Austin, TX

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