Pin Money Club

 It was one of my mom’s favorite phrases – can’t say I understood exactly what it meant when I was a child, but now that I’m a grownup, I get it. It means kicking something valuable to the curb, simply because there might be one little thing wrong with it.  In this case, the baby is your 401(k) plan. Over the last two years or so, many companies have suspended matching contributions to their 401(k) plans. Recently I was at a cocktail party where this was all anyone could talk about. One friend whose Fortune 500-employer had suspended their match declared: “Well, I can tell you this, if they’re not going to put any money into it, then you can be sure I’m not going to either” (augmented by a few choice expletives that I’ve chosen to omit here, demure little lady that I am). The 401(k) has suddenly been pinned with a Scarlet Letter through no fault of its own. It doesn’t help that every talking head and pundit from CNN to your local news to FOX (this demonizing of the 401(k) crosses party lines) are distorting the picture, proclaiming that perhaps the halcyon days of the 401(k) are over.  TIME OUT, I’m gonna need a judge’s call this one. So before I take a short MARTA ride and storm the CNN studios, let me put a few things in perspective.  It’s true that a number of companies, large and small have suspended their 401(k) matching contributions during these tough economic times. But should you take your marbles and go home if that happens to you? The short answer is, no! The key word here is “suspended” – for many companies this is a short-term, temporary measure with the intent of restoring the match either in full or at least in part in the near future. Either way the smart money knows that an employer match offers the best risk-free return on your investment – that is, if your employer matches you 100% on your first 3% of contributions, you’ve made a 100% return on your investment – tell me, where else can you earn a 100% tax-deferred return (legitimately)?  

That’s all well and good you say, but what if my employer never resumes its matching contributions; just how good is the 401(k) without a match? Well, let’s take an example –  say that you are 50 years old and have a current 401(k) balance of  $50,000 and you hope to retire 15 years from now at age 65. Your annual salary is $60,000 – with an expected increase of 2% every year (imagine what it might be if you got that long-overdue promotion) and you contribute 10% of that salary to the plan every year. If your employer matches your first 3% of contributions at 100% — a fairly typical matching formula — by age 65 you will have accumulated $331,312 in the plan. Without a match during that same time period, you would have accumulated $282,508 – a relatively nominal difference of $48,804* that I don’t believe warrants a wholesale rush to the exits.

 So what’s a smart cookie to do? Look at the whole picture before doing something you might later regret. Some pundits advise diverting your contributions to paying down debt – well if you’re lucky enough to be paying 29% on some of your credit cards that might be something to consider in the short term. As to the idea of diverting funds to other retirement savings vehicles such as a Roth IRA or an annuity, be cautious. They have their own warts and they aren’t for everyone; a careful analysis of your own personal financial situation is a must before going there.   My belief? Stick with the 401(k) as much as possible – it is still the best thing that ever happened to the American worker. It’s a painless way to save with tremendous tax benefits and you have legal rights afforded to you as a participant in these plans that do not necessarily apply to other retirement savings vehicles. I’ll talk more about that and debunk other 401(k) myths in a future article. Meanwhile : Contribute and prosper! *Source: Bloomberg.com