How To Get That Employer 401(k) Match Money If You Are Employed And Broke

by: Manoj Madhavan
Summary

Social security is in trouble.

Defined benefit pension plans are disappearing.

Hard working Americans are missing out by not contributing to their 401(k)s.

Background

Many American employers are ditching defined benefit pension plans in favor of 401(k) plans. Many of these employers offer matching contributions to their employees in these 401(k) plans. The amount of the matched contribution, the vesting period and other features differ from one employer (or plan) to the next. As long as you – the employee – invest some money into your own 401(k) account from your paycheck, your employers with 401(k) matching policies in place will give you a matching contribution. This is “free money” and it is a criminal waste to forego it.

Please note - the main idea presented in this article applies to employees whose employers offer 401(k) matching, not for employees who have a 401(k) plan at work but no matching contributions from their employer.

Social security is in trouble

From

Trustees Warn: Social Security in Financial Trouble

...According to the Trustees’ annual report, Social Security’s finances are facing growing pressure due to the aging of the population. As the large baby boom generation enters retirement and Americans continue to enjoy longer lifespans, more and more individuals will collect benefits from the system and for longer periods, while relatively fewer workers will contribute taxes to support it.

Social Security’s financial imbalance is the result of simple math. Since 2010, the Social Security program has been spending more than it has been taking in, and the Trustees project that these deficits will grow sharply in coming years. According to the report, the program’s trust funds will be exhausted in just 17 years, which will put millions of beneficiaries at risk of large benefit cuts…”

Defined benefit pension plans are disappearing

From:

The Disappearing Defined Benefit Pension and Its Potential Impact on the Retirement Incomes of Baby Boomers

…From 1980 through 2008, the proportion of private wage and salary workers participating in DB pension plans fell from 38 percent to 20 percent (Bureau of Labor Statistics 2008; Department of Labor 2002). In contrast, the percentage of workers covered by a defined contribution (DC) pension plan—that is, an investment account established and often subsidized by employers, but owned and controlled by employees—has been increasing over time…”

Hard working Americans are missing out

401(k) monies are increasingly important for future retirees facing a pension-less retirement and delayed or reduced social security benefits. But sadly, many Americans are missing out on free money from their employers by not contributing enough to their 401(k)s or not contributing at all.

From:

1 in 5 workers misses out on this free money for retirement

  • 1 in 5 workers isn't saving enough for retirement to get the full match offered by their employer.
  • 20 percent of workers currently missing out could get the full match if they boosted contributions by 1 percentage point.

From

Employees missing out on $24B in retirement savings

  • Employees missing out on $24B in employer matches

Whatever this number is - $24B or $48B - it does not matter. In my opinion, it should be zero. I do not see why any worker in corporate America today does not contribute the amount required to get the full company match in their 401(k). You do not have money? No worries. I lay out below a simple plan to get some money into your 401(k) account – even if it is just the employer portion.

Three groups of workers based on their 401(k) decisions

The “maxers”:

You are the high earners and/or ultra savers. You maxed out your 401(k) by contributing the maximum depending on your salary or company rules. Great going! This article is not for you!

The “middle grounders”:

You are not able to contribute the maximum possible to your 401(k), but you are able to save enough to be able to contribute for the full employer match. Good stuff! This article is not for you either!!

The “non-savers”:

You are barely getting by. You are living from paycheck to paycheck. Retirement savings and 401(k) contributions are the last thing on your mind. Folks, this article is for you! I am not here to lecture anyone on saving for the future, building a nest egg, living below your means or anything of that sort. You may be dealing with divorce, crushing credit card debt, student loans, unusual medical expenses, or a myriad of other financial challenges in life. My goal in this article is to show you a fairly simple way to get and keep, the free money that your employer is giving you.

Suggested plan for “non-savers” to fund their 401(k)

This is a very simple plan. As I said above, this plan is for the “non-savers.” You are living from paycheck to paycheck and cannot afford to set aside any payroll deductions for your 401(k) account. Ideally, you should not be taking early withdrawals from your 401(k). But you are not in an ideal place – financially speaking. You simply do not have any money to spare for 401(k) contributions.

For the sake of illustration, I am going to assume the following:

Salary: $40,000 per year

Marginal income tax rate: 15%

Employer 401(k) match: 100% for the first 3% and 50% for the next 3%

Vesting: Immediate for employee contribution and 1 year for employer contribution

To get the employer’s money, you need to invest 6% or $2400 per year. If you do that you get $1800 of “free money” from your employer. You cannot afford to contribute $2400 even though it is only $2040 if you factor in the tax break you get on your contribution. No matter. Invest $2400 in your 401(k) and collect the $1800 from the employer. Then withdraw your $2400 contribution. And voila! You get $1800 of free money in your 401(k) account! What about the next year? Do the same thing. In fact, keep doing this every year as long as your employer has a 401(k) match program in place. These small sums will, if wisely invested, compound over time and grow into a good sum.

Note: For simplicity sake, I ignored the 10% penalty. You will have to pay a 10% penalty for early withdrawals. This works out to $240 in our example. If you are not able to spare $240, and your plan has vested funds available, I suggest you take out $266.67 from your 401(k) to cover the $240 penalty and the $26.67 penalty on the $240. If your plan does not have vested funds available, take a one-year loan for the $240 and pay it back with an early withdrawal from your 401(k) next year.

A note to foreign workers

A significant number of foreign workers do not contribute to their 401(k) accounts at all. I have had conversations with intelligent, highly paid workers on H1-B visas about this. They tell me that they plan to go back to their home country in a few years or that they want to stay but do not expect their green cards to be processed before their visas run out. Same method can be applied here. Contribute enough to the 401(k) to get the full employer match and then take out your contribution. Better still – if you are not strapped for cash, wait. If you do go back to your home country, make your early withdrawals when you do not have US salary income. This way you would claim the tax deduction when you are in a higher tax bracket and pay the taxes on the withdrawals when you are in a lower tax bracket. Even after factoring in the 10% early withdrawal penalty, you will come out way ahead because of the “free money” from the employer match.

Allocations inside the 401(k) Plan

I have had conversations with many savers who tell me that they are not aware of what they are investing in. They chose the default allocation or have the money sitting in a money market account.

The default allocation could be an expensive one. See Fellow Contributor Dale Roberts’ article on this here.

Most employees are better off simply picking a Target Date Fund and allocating 100% of their contributions to that fund. Say you plan to retire in 2040 and your company plan is administered by Fidelity. Simply set all your 401(k) contributions to go into the Fidelity Freedom 2040 Fund and let it go on auto pilot. However, this is just one suggestion - not allocation advice. As far as allocations go, consult a financial advisor or do your own research.

Conclusion

If you work for a company that offers to match your 401(k) contributions, there is no logical reason to lose out on getting the match by not contributing your money into your 401(k) account. This is free money. Please take it. No excuses!

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.