Always Take the Match on Your 401(k)?

[This post is part of the Financial Rules of Thumb series.  Check out the rest here!]

The 401k match is incentive offered by many companies to encourage retirement savings by their employees.  During the latest financial downturn, some companies eliminated their match but they’re coming back as corporate earnings recover.  So should you participate in the 401k and take the match that is offered?

The Upperline: Unless you’re severely in debt or unable to meet your regular bills on a monthly basis, I can’t think of a reason why you wouldn’t want to take the 401k match.

I bet you’d probably like a raise, right?  Here’s the easiest one you’ll ever get.  Save in your company’s 401k, at least to the amount of the match.  Whatever they match is money that your employer is willing to pay you, but you’re just not claiming it.  This is as close to a no-brainer that I can think of when it comes to your money.  This money gets saved, for your benefit, with additional contributions from your employer, automatically from your paycheck, without you having to do anything.  What’s not to like?

When should you not take advantage of this?  

  • Overspending – If you’re spending more than you’re taking in every month leading to rising credit card balances, saving for your retirement isn’t going to do you any favors.  Don’t allow this to continue unchecked.  Get your spending under control so this doesn’t continue forever, and then you should start saving.
  • High interest credit card debt – This is a tough call. If you’ve got some high interest debt, I can understand delaying your savings to put additional funds towards eliminating that debt.  This requires discilpine and focus, so make sure that you’re actually putting those funds towards repaying the debt and not just spending it.
A few other questions I’ve heard from retirement plan particpants:

“I don’t know anything about investing so I’ll probably just make bad choices, so what does it matter?”

I’ve actually heard this statement in 401k enrollment meetings for company retirement plans.  There have never been more resources to help you with this decision, from abundant information online, resources from your plan sponsor, and from outside advisors.  We learn best by doing, and starting with your own money will give you incentive to learn.  Even if you make bad decisions, when you factor in the money from the match it’s tough to come out behind.  Who knows, something good might even happen, like being able to retire one day.

“I don’t think I’ll be at this job for very long, so it might not vest”  

I suppose that’s true.  However, the money you contribute is always your own and I’ve never heard anybody regret saving some of their own money.  Maybe you will get a new job and not leave with any of the employer match (each plan is unique with these rules, so talk to your HR team about what the specifics are at your company).  However, it’s harder to find new jobs in this economy.  For plans that use a vesting schedule, you often get a percentage at the end of your first year so even a short stretch can give your savings a boost.  If a few months stretches into a few years, you’re in the habit of saving as well as benefiting from more and more of your employer’s contributions.

What other questions do you have about 401k plans and matching?