should participate in employer matches?
should participate in employer matches?
This may be a crazy question but if my employer matches up to 3%, and the investment options are just horrible, should I even put many own money in it?
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Re: should participate in employer matches?
Unless the expense ratios of these horrible options are anywhere close to 3%, still invest up to the match.
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Re: should participate in employer matches?
Up to the amount of the match, almost certainly yes.
Assuming that the options aren't horrible enough to cost you the free 3%, at least, which I've never seen.
If you post the options here, we would have more information on which to base the answer.
Assuming that the options aren't horrible enough to cost you the free 3%, at least, which I've never seen.
If you post the options here, we would have more information on which to base the answer.
In theory, theory and practice are identical. In practice, they often differ.
- jimb_fromATL
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Re: should participate in employer matches?
Absolutely. It doesn't matter what you earn on the investment in the account, it's equivalent to an increase in pay that you can invest with taxes deferred for the rest of your life until you eventually withdraw it. I don't know of any 401(k) that have fees higher than the 25% to 100% that most employers match for your contributions.
jimb
jimb
Re: should participate in employer matches?
Yes, this is a crazy question.
You'd have to lose more than 50% of your account to be worse off than contributing up to the match.
TRUE STORY: At one firm, I was a middle manager and constrained in contributions because lower level employees were not contributing as high a percentage. I wondered why management had not done more to educate the staff, "We don't really want folks around who are too stupid to understand that a 5% match is free money."
You'd have to lose more than 50% of your account to be worse off than contributing up to the match.
TRUE STORY: At one firm, I was a middle manager and constrained in contributions because lower level employees were not contributing as high a percentage. I wondered why management had not done more to educate the staff, "We don't really want folks around who are too stupid to understand that a 5% match is free money."
The mightiest Oak is just a nut who stayed the course.
- Crimsontide
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Re: should participate in employer matches?
How horrible could they be? Surely you have one or two funds that would be suitable to ensure you at least get the match. Can you post them for review?skeptic88 wrote:This may be a crazy question but if my employer matches up to 3%, and the investment options are just horrible, should I even put many own money in it?
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Re: should participate in employer matches?
I'm not the OP but some people do have horrible fees in their 401k's.
My 401k. 2.4% fees
My Wife's 401k 2% fees
^ I consider these awful.
My 401k. 2.4% fees
My Wife's 401k 2% fees
^ I consider these awful.
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Re: should participate in employer matches?
I think there is confusion on the percentages. Allow me to elaborate and feel free to contradict.
Let's say, your match is 3% and expense ratio is 3%. If your contribution is 3% at 100k, and company match is 3%, that means you contributed 3000 and company contributed 3000 for a totla of $6000. The expense ratio is 3% of 6000 which is about $180. So, your net profit is 3000 (company match) - 180 = $2820 and this is after the 3% expense ratio on your contribution accounted for. Now let us say, you put this in your own investment with 0 expense ratio, you only have 3000 and lost out on the $2820.
Essentially the company match is free money and is a no-brainer. Beyond the company match, you need to evaluate the high fees etc.
Let's say, your match is 3% and expense ratio is 3%. If your contribution is 3% at 100k, and company match is 3%, that means you contributed 3000 and company contributed 3000 for a totla of $6000. The expense ratio is 3% of 6000 which is about $180. So, your net profit is 3000 (company match) - 180 = $2820 and this is after the 3% expense ratio on your contribution accounted for. Now let us say, you put this in your own investment with 0 expense ratio, you only have 3000 and lost out on the $2820.
Essentially the company match is free money and is a no-brainer. Beyond the company match, you need to evaluate the high fees etc.
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Re: should participate in employer matches?
Here is rule of thumb for bad 401
http://www.bogleheads.org/forum/viewtopic.php?t=67345
Grabiner wrote
John
http://www.bogleheads.org/forum/viewtopic.php?t=67345
Grabiner wrote
30% is my rule of thumb for using taxable accounts instead, but is it really likely that you will lose that much? That is, how confident are you that you and your wife will stay with the same employers for 30 years? When you leave the employer, you can roll the 401(k) into a Roth. If you leave after 10 years with funds at 1% expenses, you will have lost 8% in the expense ratio difference (1% minus Vanguard's 0.2%) and 5.75% to the loads if you have to pay them; this is far better than a taxable account.
And if you do use the 401(k) plans, try to choose the lowest-cost funds in the plans, and fill in the gaps with your Roth IRAs.[
John
Re: should participate in employer matches?
Unfortunately, it is not that simple. Let's say you have been in this plan for 25 years, 25 years of $6000 is $150,000 in contributions. With investment gains, let's also say your account is now $200,000. For year 26, your 3% fee will be $6000 which will eat up all the new contributions to the plan. So, when you start, the fees are small compared to the match. However, if you stay at the company long enough, the fees will grow to the point where it does not make sense to continue contributions. Better results would be obtained if the employer switched to a lower cost plan, or if you rolled over the account to a low cost IRA or another 401k as soon as you are able.saagar_is_cool wrote:I think there is confusion on the percentages. Allow me to elaborate and feel free to contradict.
Let's say, your match is 3% and expense ratio is 3%. If your contribution is 3% at 100k, and company match is 3%, that means you contributed 3000 and company contributed 3000 for a totla of $6000. The expense ratio is 3% of 6000 which is about $180. So, your net profit is 3000 (company match) - 180 = $2820 and this is after the 3% expense ratio on your contribution accounted for. Now let us say, you put this in your own investment with 0 expense ratio, you only have 3000 and lost out on the $2820.
Essentially the company match is free money and is a no-brainer. Beyond the company match, you need to evaluate the high fees etc.
Jeff
Re: should participate in employer matches?
OP, how long do you plan to stay with this employer?
As mentioned above, the longer you stay with the employer and contribute to the 401k, the more the fees will start to eat into your returns (even with the employer match).
If you plan to be there for, say, less than ten years, then contribute enough to get the match.
As mentioned above, the longer you stay with the employer and contribute to the 401k, the more the fees will start to eat into your returns (even with the employer match).
If you plan to be there for, say, less than ten years, then contribute enough to get the match.
"Ritter, Tod und Teufel"
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Re: should participate in employer matches?
I agree to a certain extent on the fee. This statement is not true though - "For year 26, your 3% fee will be $6000" Assuming continued employment, each year fee is still 3% of that year contribution which is $180. 3% of entire balance which is nearly $6000 is applicable whether or not you contribute for 26th year. So, the only differential is the current year fee which still holds good. I would say factoring in opportunity cost, the alternative is only having $75,000 of personal contribution vs. 150,000 with $6000 fee. The breakeven would seem like additive fees added when the sum meets employer contribution total but the gains on the employer contributions would not be accounted for. To put it in perspective, assuming average gain is 6% year over year on balance, the gain of 6% covers the total expense ratio on personal and employer contribution and the additive sum of employer contribution is still a profit.jsl11 wrote:Unfortunately, it is not that simple. Let's say you have been in this plan for 25 years, 25 years of $6000 is $150,000 in contributions. With investment gains, let's also say your account is now $200,000. For year 26, your 3% fee will be $6000 which will eat up all the new contributions to the plan. So, when you start, the fees are small compared to the match. However, if you stay at the company long enough, the fees will grow to the point where it does not make sense to continue contributions. Better results would be obtained if the employer switched to a lower cost plan, or if you rolled over the account to a low cost IRA or another 401k as soon as you are able.saagar_is_cool wrote:I think there is confusion on the percentages. Allow me to elaborate and feel free to contradict.
Let's say, your match is 3% and expense ratio is 3%. If your contribution is 3% at 100k, and company match is 3%, that means you contributed 3000 and company contributed 3000 for a totla of $6000. The expense ratio is 3% of 6000 which is about $180. So, your net profit is 3000 (company match) - 180 = $2820 and this is after the 3% expense ratio on your contribution accounted for. Now let us say, you put this in your own investment with 0 expense ratio, you only have 3000 and lost out on the $2820.
Essentially the company match is free money and is a no-brainer. Beyond the company match, you need to evaluate the high fees etc.
Jeff
Re: should participate in employer matches?
I would suggest that you do not want to be in such a plan for 25 years. In the early years, the fees are annoying. In the later years, they become confiscatory. The best idea is to contribute for up to 10 years, or so, and then get the money out of there. This may require the employee to resign. If the employee plans on being in the job for a very long time, they would be better off without putting money into the plan. If plan rollovers are allowed, that would solve the problem.saagar_is_cool wrote:I agree to a certain extent on the fee. This statement is not true though - "For year 26, your 3% fee will be $6000" Assuming continued employment, each year fee is still 3% of that year contribution which is $180. 3% of entire balance which is nearly $6000 is applicable whether or not you contribute for 26th year. So, the only differential is the current year fee which still holds good. I would say factoring in opportunity cost, the alternative is only having $75,000 of personal contribution vs. 150,000 with $6000 fee. The breakeven would seem like additive fees added when the sum meets employer contribution total but the gains on the employer contributions would not be accounted for. To put it in perspective, assuming average gain is 6% year over year on balance, the gain of 6% covers the total expense ratio on personal and employer contribution and the additive sum of employer contribution is still a profit.jsl11 wrote:Unfortunately, it is not that simple. Let's say you have been in this plan for 25 years, 25 years of $6000 is $150,000 in contributions. With investment gains, let's also say your account is now $200,000. For year 26, your 3% fee will be $6000 which will eat up all the new contributions to the plan. So, when you start, the fees are small compared to the match. However, if you stay at the company long enough, the fees will grow to the point where it does not make sense to continue contributions. Better results would be obtained if the employer switched to a lower cost plan, or if you rolled over the account to a low cost IRA or another 401k as soon as you are able.saagar_is_cool wrote:I think there is confusion on the percentages. Allow me to elaborate and feel free to contradict.
Let's say, your match is 3% and expense ratio is 3%. If your contribution is 3% at 100k, and company match is 3%, that means you contributed 3000 and company contributed 3000 for a totla of $6000. The expense ratio is 3% of 6000 which is about $180. So, your net profit is 3000 (company match) - 180 = $2820 and this is after the 3% expense ratio on your contribution accounted for. Now let us say, you put this in your own investment with 0 expense ratio, you only have 3000 and lost out on the $2820.
Essentially the company match is free money and is a no-brainer. Beyond the company match, you need to evaluate the high fees etc.
Jeff
Jeff
Re: should participate in employer matches?
Skpetic, can you tell us what the investment options are?
70% Global Stocks / 30% Bonds
Re: should participate in employer matches?
Work out the math. Suppose that you could earn 8% per year in an IRA, and 5% per year with the same risk level in your employer plan because the expenses are 3% higher (about the worst I have seen). If you put $1000 in an IRA for 25 years at 8% return, you will have $6848. If you put $1000 in the employer plan with an immediate match, $2000 invested for 25 years at 5% return will be worth $6772. Thus, if you stay in the plan for 25 years, you still break even on taking the match.skeptic88 wrote:This may be a crazy question but if my employer matches up to 3%, and the investment options are just horrible, should I even put many own money in it?
And if you leave the employer in less than 25 years, you can roll the employer plan over to an IRA, and not pay the higher expenses any more. If this happens, or if the plan improves, or if it isn't quite as bad as my estimate, you'll wind up ahead.
The 30% rule of thumb would be appropriate for contributions beyond the match; you should take the match, then max out your IRA, and if you still have more to invest, you should contribute more to the employer plan if you expect to be stuck with the plan for less than ten years.
Re: should participate in employer matches?
In my experience, corporate plans change much more often than 25 years. The average corporate tenure is less than 7 years. Between these two likelihoods, the account isn't likely IMHO to reach a decision point to avoid contributing.
Every time I left, I learned to rollover my account to my IRA. Easier, better control of expenses, and safer than the uncertainty of a company that might be sold, closed or change adminstrators and lose track of you.
Every time I left, I learned to rollover my account to my IRA. Easier, better control of expenses, and safer than the uncertainty of a company that might be sold, closed or change adminstrators and lose track of you.
The mightiest Oak is just a nut who stayed the course.
Re: should participate in employer matches?
Absolutely. Never turn down free money. Just contribute the minimum to get the match if the options are all terrible.
I’d trade it all for a little more |
-C Montgomery Burns
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Re: should participate in employer matches?
I thought investing to get match was a giving, very little chance of downsidegrabiner wrote:Work out the math. Suppose that you could earn 8% per year in an IRA, and 5% per year with the same risk level in your employer plan because the expenses are 3% higher (about the worst I have seen). If you put $1000 in an IRA for 25 years at 8% return, you will have $6848. If you put $1000 in the employer plan with an immediate match, $2000 invested for 25 years at 5% return will be worth $6772. Thus, if you stay in the plan for 25 years, you still break even on taking the match.skeptic88 wrote:This may be a crazy question but if my employer matches up to 3%, and the investment options are just horrible, should I even put many own money in it?
And if you leave the employer in less than 25 years, you can roll the employer plan over to an IRA, and not pay the higher expenses any more. If this happens, or if the plan improves, or if it isn't quite as bad as my estimate, you'll wind up ahead.
The 30% rule of thumb would be appropriate for contributions beyond the match; you should take the match, then max out your IRA, and if you still have more to invest, you should contribute more to the employer plan if you expect to be stuck with the plan for less than ten years.
Your rule of thumb was linked to be educational, some posters have thought there plans were terrible but were workable
John
- dratkinson
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Re: should participate in employer matches?
Believe I've read here of some doing an annual rollover (in-service transfer) of 401k contributions to an IRA. If so then could use annual rollover to get full 401k contribution limit, get employer's match, and reduce future costs. Would need to check your 401k plan to see if in-service transfer is allowed.
401k rollover should not affect own annual IRA contribution limit.
A quick look found:
http://www.irs.gov/Retirement-Plans/Pla ... tion-Rules
And if you like, once you get the money into a tIRA, you could convert it to a rIRA and pay owed taxes from external source.
Double check everything as I've been wrong before.
401k rollover should not affect own annual IRA contribution limit.
A quick look found:
http://www.irs.gov/Retirement-Plans/Pla ... tion-Rules
- Rollovers from a 401(k) plan. A rollover occurs when the participant receives a distribution of cash or other assets from one qualified retirement plan and contributes all or part of the distribution within 60 days to another qualified retirement plan or traditional IRA. This transaction is not taxable but it is reportable on Form 1099-R and the participant’s federal tax return. A participant can roll over most distributions except for:
* A distribution that is one of a series of payments based on life expectancy or paid over a period of ten years or more,
* A required minimum distribution,
* A corrective distribution of excess deferrals or contributions (including income allocable to these amounts),
* A hardship distribution, or
* Dividends on employer securities.
...
And if you like, once you get the money into a tIRA, you could convert it to a rIRA and pay owed taxes from external source.
Double check everything as I've been wrong before.
d.r.a., not dr.a. | I'm a novice investor; you are forewarned.
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Re: should participate in employer matches?
That's not allowed (by law) for employee deferrals or Roth contributions unless the person has reached age 59-1/2 but it is permitted do that with after tax contributions if the plan allows those.dratkinson wrote:Believe I've read here of some doing an annual rollover (in-service transfer) of 401k contributions to an IRA. If so then could use annual rollover to get full 401k contribution limit, get employer's match, and reduce future costs.
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Re: should participate in employer matches?
Given that the employer plan may change, and you may change jobs and be able to transfer your funds, yes it is still worth getting that corporate match.
100% return. Instantly.
100% return. Instantly.