Why You Should Still Stick with Your 401k and Employer Match

by Kevin on October 29, 2008

There is a lot of fear and misinformation running around out in the public domain. Whether it be an official reporter for a major newspaper, an influential blogger, your neighbor who stops you as you pull into the driveway, or your co-worker muttering under her breath at work… everyone has an opinion on the current state of everything.

Including me.

So that’s my disclaimer. I’m one of millions of people pondering our current economic plight.

One thing remains true: an employer match on your 401k contributions is still a great decision.

Why You Should Never Avoid Employer 401k Matches

Even in these troubled economic times with Wall Street up 10% one day and down 5% the next, you should continue to invest in your 401k.

It’s simple math. As always with math, an example usually helps speed up the discussion and understanding of the concept.

Let’s assume you have a generous employer that will match 50% of every contribution you put into your 401k, up to a maximum of 6% (so they’ll contribute 3% while you contribute 6%).

If you put in $1,000, they will put in $500. That’s an immediate return of 50%. Not only that, but it is risk-free return. You are guaranteed a 50% return on your contributions.

“But what if the market tanks?”

What if it does? Actually as you know the market has tanked has over the last 12 months… a good 39% or so reduction in the S&P 500 index.

But assuming you have time for your investments to recover, and have your assets allocated correctly, you’d be silly to stop contributing to your 401k plan. For people at age 59 with a 100% stock allocation you need to make some serious changes. For the rest of you, read on.

Let’s sketch out the worst case scenario. At the absolute height of the market, around October 12th of 2007, you put all of your contribution in for your 401k for the next year. Unfortunately your employer also decided to drop their match of your contribution in at the height of the market as well. They’ll match you 50%, so you now have 150% of your original contribution sitting in your 401k account.

For sake of simplicity let’s also assume the market tanks a whopping 50%. Your previous 401k has been ransacked and it hurts to look at the account balance. But what about the math?

  • No employer match: 100% of contribution x 50% loss = left with 50% of original
  • With employer match: 150% of contribution x 50% loss = left with 75% of original

Even though your account is down, you are still higher than you would have been otherwise — by a whopping 25%.

An additional point: this is highly unlikely. You would you not put all of your contributions in on one day. My work’s 401k plan takes out the contribution with every check. So over the last year as the market has gone down, down, and down some more… I have been dollar cost averaging down with it. I’m not putting in all of my contribution at the peak of the market. I’m slowly getting lower prices over time. This would help with comparative returns as well.

The Bottom Line

It’s free money. You can’t beat returns like this. Whether your employer matches a dollar amount, or 50% of your contribution, or 100% of your contribution… it’s free money. If you can financially make due, get the maximum match possible.

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Start-Up October 29, 2008 at 11:36 am

I agree that you should never not put in the max in order to get the match from your company (if that makes sense). If you’re worried about the stock market tanking then invest your 401k money in bonds or safe investments. Personally I would continue investing in stocks as they are at a significant discount.

Russell October 30, 2008 at 7:53 am

Although your math almost argues against putting more than the matching amount in. I was putting 12% and getting the maximum 3% matched by the employer. 125% of contribution x 50% loss = 65% of original. (Not the 75% of your example.)

This example does support my move to convert some funds into a Roth IRA, in this example I will pay tax on 65% of my original contribution, instead of paying on 100% if I had taken the income as pay.

Although as you noted the contribution wasn’t all made at the same time so the loss isn’t this great.

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