fb-pixelWhat to do when your 401(k) match is terrible - The Boston Globe Skip to main content
Personal Finance

What to do when your 401(k) match is terrible

Want the cash to pile up faster? Save 12 to 15 percent of pay, planners say.Associated Press/File 2013

WASHINGTON — Typical retirement advice calls for contributing to your 401(k) account at least to max out the company match.

There’s no denying that the match is a huge part of retirement planning. Employer contributions can really add up.

For instance, employees in the top income quartile who were automatically enrolled in their 401(k)s in their late 20s would have a median of 6.8 times their last salary by age 65, according to an Employee Benefits Research Institute analysis from 2010. About 40 percent of that would be attributed to the company match.

But what if there is no match? Or if the match is cut to, say, 1 percent? Is that the time to ditch the 401(k) for a retirement plan such as a traditional Individual Retirement Account or a Roth?

Advertisement



Not so fast.

Financial advisers say many workers benefit from sticking with their 401(k) plans. The tax benefits, combined with the ease of use and other advantages, may be enough to make the accounts worth using — match or no match.

Here are things to consider when deciding how much to contribute to a 401(k) versus another retirement plan:

Employer contributions

An employee who just saw his matching contribution reduced may have to make up for the cut, at least in part, by increasing his own contribution, says Maria Bruno, a senior investment analyst with Vanguard. Workers who can’t make up for difference entirely now might want to sign up to have their contribution rate increased automatically each year, so the savings rate rises slowly over time, she says.

Bruno says she recommends that people sock away 12 to 15 percent of their pay into a retirement account — including their employer match.

Workers should contribute enough to their 401(k)s to take advantage of a matching contribution, no matter how small. (The average employer contributes 4.5 percent of pay to a retirement account, according to the Plan Sponsor Council of America, a trade group supporting employer sponsored plans.) Otherwise, they are leaving free money on the table, Bruno says.

Advertisement



This doesn’t mean contributions should stop there. The tax savings that stem from investing earnings pretax and of letting them grow tax-free until retirement may be enough incentive to invest beyond the match.

Contribution limits

People saving for retirement may want to stick with their 401(k) even if there is no company match because of the higher contribution limit associated with them, when compared to other retirement accounts.

Workers can put up to $17,500 a year of tax-deferred income into a 401(k). That’s more than three times the $5,500 total that can be put each year into an Individual Retirement Account or a Roth IRA, which takes after-tax dollars.

Ambitious savers can fill both a 401(k) and an IRA (traditional or Roth). But contributions to a traditional IRA may not be deductible for a person covered by a retirement plan at work.

Contributions to Roth IRAs are also capped based on income.

Ease of use

Once a 401(k) is set up, the money is withdrawn automatically and regularly from workers’ paychecks. They can’t miss the money because they hardly see it, Bruno says. That’s why some employers automatically enroll workers in the retirement plans and lock in the escalation rate, which increases the contribution each year.

Other retirement accounts, including an IRA, often require more action from savers. Some investment firms also offer automatic contributions for IRAs, but people often make the contributions at tax time after they know what their income will be for the year and if the contribution will help lower their tax bill. When done in that way, some people may decide against contributing if they didn’t earn as much as expected or if they don’t want to go through the hassle.

Advertisement



Investment options

For many workers, the decision between a 401(k) and an IRA will come down to the investment choices offered.

Some workers in smaller retirement plans with fewer or more expensive options may find they can save on fees by investing primarily in an IRA, says Michael Mussio, managing director of FBB Capital Partners in Bethesda, Md. In contrast, those workers with 401(k) plans that offer a variety of low-cost investment options, such as exchange-traded funds, may be better off sticking with those accounts, he says.

‘‘If the all-in costs are less than 1 percent, then you’re probably OK,’’ he says of the expense ratios charged by mutual funds or ETFs.