Are you giving up free money?

I was having lunch with some co-workers recently, and an older co-worker was talking about taking a loan from his 401k plan to help with a downpayment on a new house (an interesting idea for a future post). To my surprise, two of my other coworkers with me, who started work the same time as I, replied “401k? We’re not even enrolled.”. I was totally stunned. I mean, these guys are within a year or two of my age, single, and one of them even lives at home! We’ve all been working at least two years, so even with student loans there’s no way they can’t afford to save some of their current income.

The killer? Our company generously matches the first 6% you put in our 401k, dollar for dollar. Granted it doesn’t fully vest for 5 years, but still, that’s 6% free money! For them, that’s almost like getting an IRA fully funded automatically every year. Sigh.

The drop-dead-and-kick-you-in-your-pants killer? They don’t even know the match exists. They figure that they will starting thinking about retirement when they “settle down” with a wife, etc. And they aren’t the only one. According an article in Kiplinger’s Personal Finance this month, $89 million dollars of employer matches were left on the table in 2003. $89 million! This also makes me doubt the ability of people to manage their own social security accounts, but I don’t want to get into that. For now, I just want to encourage everyone out there who hasn’t signed up for their company’s 401k to at least talk to the HR person and see what they are missing. They are usually very nice and happy to talk with you. Please.

Comments

  1. Good post! $89mil is huge. I often find also that folks don’t realize that since the contribution is pre-tax, $100 401(k) deduction doesn’t cost $100 in net pay decrease. There are some decent calculators out there to help one figure out the balance between net pay decrease and maximizing the contribution.

  2. I think that the books “Common Sense on Mutual Funds” by John Bogle and whoever wrote “The Millionaire Next Door” should be required reading by seniors in high school. Make them all do a book report on those books.

    The government doesn’t give us many breaks, but you have to take advantage of the ones they do.

    (And, I think Social Security Private Accounts are dead, Jim.)

    Nice mention in the WSJ today!

  3. Money Turtle says:

    I experience the same scenario at work. The company offers a good 401k plan and not many people take advantage of it. I always try to convince my coworkers to invest in the 401K plan.

  4. Yeah, people aren’t smart.

    I’ve been saving in a 401k since I started working “real” jobs. My first employer matched contributions and my savings grew quickly. Unfortunately, I’ve been working for startups for the past 6 years and they never match. Now my 401k doesn’t grow so fast.

    I can’t believe anyone would pass up a matching contribution 401k. Once you’ve got it set up, you tend to forget that there’s money that you’re not seeing.

    I guess that means the thing to recommend is to get people to start contributing as soon as they start the job. Then they never miss it.

  5. jonathan…tell your coworker to resist the temptation, if at all possible…if he (assumming a guy) took out a 401k loan, he must repay it…in effect, he would be repaying the loan with money that has already been taxed, thus defeating the purpose of the 401k…then, when he is forced to take it out at age 70, he will be taxed on those same dollars again!!!…talk about a double-taxation…

    if he must take from retirement funds, a roth ira would be the better solution…in addition to his original contributions, he can even take out his earnings tax-free (which is possible when buying a home)…the thing i don’t like about this, though, is that he will never be able to make up those original contributions…you only get those once a year, never to be seen again…doh!!!…

    the best way, in my opinion, is what you are doing, jonathan…save up for at least 20% of the down payment using non-retirement funds…

  6. Right out of college, I didn’t pariticpate in my 401k for 4 years (I should have). Then again, I put a lot of my money in the market (’93 – ’97), so things turned out pretty well.

    Now, I maximize how much I can put in my 401k!

    Jack

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  1. [...] = 'wpp-262'; var addthis_config = {"data_track_clickback":false};After hearing a co-worker talk about taking a 401(k) loan to help with the downpayment on his new house, I decided to ask the HR Department about it. Here [...]

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