Putting Up with Pitiful 401k Plans

by Kevin on February 17, 2009

Despite the risk of someone from my company reading this, I declare: my company’s 401k plan sucks.

And it bothers me.

A lot.

Why My 401k Sucks

My beef with the company 401k is the match. It’s all about the pitiful company match.

As far as I can tell most firms will match a percentage of what you contribute to your 401k plan up to a certain percentage. Perhaps a 50% match of everything you contribute up to 6% of your salary (math whiz: up to 3% of your salary). Perhaps they are extraordinarily generous and offer to go ahead and put a set percentage in your account regardless of how much you put in. Or maybe they’ll match 100% of what you contribute, but the cap is lower such a 3% total.

These are all fine and dandy. I would be more than pleased to have any of these options for my 401k plan.

Our company match is pathetic. Here’s how our 401k match plan works:

  • Company matches 100% of your first $500 in contributions
  • After $500, the company matches 50% of the next $500
  • After that, the company matches 0%

You are reading that correctly. Yes, if I put in $4,000 the company match is $750. If I put in $1,000, the company match is $750. The maximum match is $750. That’s it. It doesn’t matter if you’re pulling in $150,000 per year and that equates to a 0.5% match. It is what it is, but I still think it sucks.

On top of all of that I am not exactly thrilled with all of the investment options. There are two index funds — Vanguard’s S&P 500 index and Vanguard’s Total Bond Index. Everything else is actively managed. And we all know what that means.

Why I Put Up (Still Contribute) to a Bad 401k Plan

There are two reasons you and I should both put up with a bad 401k plan.

I can’t change it.

Nothing I say, write, or present will convince the executives at my firm to change the 401k match. I would guess the same is true for you as well. I’m not in control of what goes in the plan or how much the match is. That decision is made elsewhere — a place I’m not invited. I work for a decent sized firm. Perhaps if I worked for a company of 50 or less employees I might be able to convince someone of importance to change it. As the firm gets larger the likelihood of a significant change occurring decreases.

On top of that, even if I had the gusto to challenge the executive team to increase the match, would I dare do it? The squeaky wheel gets the grease. And in this economy, the grease may be a pink slip. No thanks.

It’s free money.

Assuming you are getting some sort of itty bitty match, it’s still a match. It may be a pittance that barely nudges the line graph showing your total investment amount, but it is still free money. Free money.

Free money is like a 100% return on your invested amount. In my case if I only invest $1,000, a $750 match is a 75% instant return on that money. That’s still a good deal even with the markets down.

Should you continue to contribute after you hit the maximum match cap? That depends, and we’ll talk about it tomorrow.

In the meantime drop a comment — how is your company 401k match setup? I wonder where my company falls in the ranking of things — could there really be any worse 401k plans out there?


Glen February 17, 2009 at 8:03 am

While you may think your plan sucks, in these times, you should be thankful you have one.

My company matches the first $1,000, 100% and provides an additional $1,000 contribution at the end of the year to all employees who participated during the year. Not the best in the world but some free money.

Many companies eliminated all Company matching funds in 2008 due to current economic conditions.

D. Smith February 17, 2009 at 8:07 am

My employer offers a 457 plan rather than a 401k. I can’t get any of it unless I work at least 10 years. So if I quit before then, I just threw money away. Sucks.. BUT, they’re contribution match may be slightly better bc of the “tenure” rule. They match % up to 5%, but to get that 5% I only have to contribue 3%. Kind of a sweet deal, but it’s all invested so I haven’t really gained that much money here recently.

the weakonomist February 17, 2009 at 8:13 am

That plan does suck. You won’t like mine in comparison. I get 100% of the first 6%, with 1/3 of that coming in the form of company stock. Because I’ve had plans like you have now, I don’t complain too much about the company stock part. I’m almost exclusively in index funds as well.

My previous employer did 50% match on the first 3%, in company stock. They just dumped all matching. On top of that, their funds all sucked, active c-shares with 2% maint fees.

Claire February 17, 2009 at 9:19 am

I don’t know if they get worse than yours, but I can tell you my husband’s is fantastic. His company puts in 9%, and then if he puts in another 3%, they’ll match that, and this is all cash, not stock. So they put in 12% of his salary to his 403(b) (I think their contributions actually go in a 403(a), but it’s essentially the same thing). I love this benefit.

PT Money February 17, 2009 at 11:00 am

My match was bad too until last week when they cut it completely. They aren’t laying off people. Instead they’re taking their motivation for saving away. I have my beef with the latter, but I don’t want the former.

Michael February 17, 2009 at 11:08 am

As much as I may have beef with my company on certain operations issues, the 401k plan is pretty freaking awesome.

They have a profit-sharing plan: as long as the company is doing alright they’ll contribute a percentage of your salary to your 401k with no match required.

Even with last year’s less-than-stellar numbers, we received a 6% contribution.

Ricky February 17, 2009 at 2:16 pm

My company matches 100% up to 3% of your salary. I can’t say that I disagree with you completely. Compared to some 401k plans out there, your’s is not so great. However, I must say that no company regardless of size is obligated to provide any type of 401k plan. yet…

ObliviousInvestor February 17, 2009 at 7:00 pm

If it comes with a match at all, there’s no reason to complain.

My wife just changed jobs, and their 401k has literally no match at all.

Brian February 17, 2009 at 7:17 pm

I have a zero percent match, but I also have a defined pension plan, my wife’s plan works out to a 4% after the break down.

You might not be able to do much about the match your Co provides, but maybe talking to the person in HR will help. Years ago I was part of a group that researched our options for the funds that where offered, During that ongoing two years, I learned that the Merrill Lynch plans offered cost the company $ and the company was only willing to spend so much for the entire plan, I started agitating for a change in the 401k provider. Most companies are clueless about the hidden fees and other junk that 401k providers offer, they only see the bottom line and take the minimum needed to keep from being sued. Good luck to you.

Frank February 17, 2009 at 7:17 pm

Actually, all you need to do to get your company to increase the match is convince enough of your fellow workers (especially the least well paid ones) to stop participating in the 401(k).

Company matches exist for only one reason: as a bribe to lower-paid employees to do what’s probably in their own best interests and participate in the plan. The IRS has complicated rules that limit how skewed 401(k) participation can be to higher-paid employees. If it’s too much to the high-paid folks and not enough of the low-paid folks then the plan actaully has to give back some money to the higher-paid workers at the end of the year.

Ironically, if you’re working in a place with relatively responsible and thoughtful types who all contribute to the 401(k) your company is less likely to match.

B7 February 17, 2009 at 8:25 pm

Hate to be the one to break it to you, but your it’s not your plan that sucks. It’s something else.

Why is it your employer’s job to have a “good” retirement plan for you? Why isn’t $750 in free money enough?

Besides, how would you invest if it had a great plan? Index funds suck too…

Flyerist February 17, 2009 at 9:33 pm

I get 6% non-matching (I don’t have to contribute anything to get this). I have cut back my contribution to 0% for the time being and am focusing on paying off debt instead.

Kevin February 17, 2009 at 10:33 pm

These comments and future discussion will be featured tomorrow morning.

@Glen: I see your point, but I still think it sucks. I suppose my argument is that of plans with some sort of a match, ours is pretty ugly in percentage terms. You are right that some plans have no match which is just… well, pathetic.

@D Smith: I guess it is incentive to get you to stay. I used to work for a company like that but I think the vesting period was 5 years not 10. Ten is a long time depending on your profession.

@the weakonomist: I do hate your plan! Wow, 100% of 6% would be awesome. With your stock are you allowed to sell it quickly for diversification purposes?

@Claire: I can only dream of a 401k like that. Obviously other things come into job satisfaction, but that would definitely make me more satisfied.

@PT: I can understand a company doing this as a way to cut costs. But I’ve got to think there are larger line items (cough executive compensation) that might take a hit first rather than the future retirement of the workers. That is unless it has come down to “we cut all of these benefits or the company goes under”… in which case you are likely just prolonging the inevitable.

@Michael: That’s awesome man. What happens in a down year? Do they take money out of your 401k? (Just kidding…)

@Ricky: You are right. There is no obligation, no written law, that says they have to offer a 401k or a 401k match. My argument is part of attracting the most talented workers is to offer the most impressive benefits. I suppose my company doesn’t take that view.

@Oblivious: Now this is really interesting to me. Without prying too much, why did she change jobs? I’m guessing there are other benefits, fringe or not, that made a move the right thing to do. If someone offered to double my pay today, but drop my 401k match completely, I would do it in a heartbeat. I’m curious as to her reasons.

@Brian: I completely agree. Companies sell products and then don’t realize that when a 401k plan administrator walks into the building that they are selling something to. I’m thinking there isn’t a lot of shopping around going on, but I could be wrong.

@Frank: Interesting tidbit! Do you happen to know what the percentage has to be for something like that to kick in? I’m a small fish in a medium sized pond so I doubt I could convince anyone to stop.

@B7: I love comments like this. They get me riled up. I never said it was my employer’s job to have a “good” retirement plan. But think of it competitively. Two identical (or close to it) firms are vying for the same pot of qualified potential employees out in the job market. One offers a great company match or other benefits. The other does not. Where do you think the highest qualified folks try to go first?

If you read the post you’ll notice I said I’ll take any free money they hand my way. But if competing firms are offering set percentages — 3 or 6% as others have commented — why wouldn’t you try to stay competitive?

As to your other comment I disagree completely. If index funds suck then there is no where to invest. Period. Now indexes are down this year (quite a lot obviously), but they are tracking the market. Which is also down. Index funds cost significantly less than actively managed funds and generally with equal or better results. Would you prefer to stick your 401k investments in a mattress? You can disagree, that’s fine. But offer an alternative investment vehicle so we can discuss it.

@Flyerist: That’s what I would do if I were in your situation (assuming your debt is non-mortgage debt). If you don’t have to contribute to get the match, take the money and run… and use what you earn to get to a debt-free lifestyle. Congrats, that’s a great match.

Kathryn H. February 17, 2009 at 11:15 pm

My husband’s company is 70% of the first 4% and 50% of the 2nd 4%. All the matching is company stock fund. Company stock, like most companies is way down. We have been leaving all the money in the stock for the time being. We will sell it all when it rebounds. for now, we just leave it be. We used to rebalance the plan quarterly…. but for now we just adjust the future contributions, to reflect what is doing the best.

B7 February 18, 2009 at 7:01 am

Hi Kevin,

That’s a good point. I didn’t think about that.Yes, it’s true that a good retirement plan would attract higher quality employees…

What about this though. Do you have any power to change the company’s plan? Is it really going to help you by complaining about what you can’t change?

“There is no where else to invest?” Are you kidding me? Yes, it’s true that index funds are better than high cost managed funds. But that’s like saying it’s better to get kicked in the stomach than having an eye poked out. But who wants to be kicked in the stomach?

There are innumerable ways to invest. Maybe the 401K doesn’t give you access to them. In that case, it’s better that your employer’s plan sucks. Or, maybe it’s better to quit and roll it over into a self directed IRA…

Here’s my point. It’s not a question of your 401K sucking. It’s a question of how you invest money.

LAL February 18, 2009 at 8:23 am

My DH gets 100% match up to 5%. But his old company? No match. I heard from friends more than few had their matches pulled this year.

I think they and many others are grateful to have jobs and sounds like you are too! Right now a job is even more important than a 401k.

You can’t fund a 401k if you have no money to fund it with. And you need a job to fund it.

Kevin February 22, 2009 at 12:06 am

@Kathryn: Are you allowed to sell the stock relatively quickly? Even with it being down, I will still sell to diversify. Too many eggs (job + retirement) in one basket.

@LAL: Right you are. I’d rather have a job, too. I think anyone would.

tommy March 24, 2009 at 12:22 pm

my company matches 8% if you contribute a min of 2% in company stock but we can diversify it right away. thats not bad… that’s 8% of my salary free saved for the next 30+ years of work…its a pretty good benefit working for a huge energy company =)

felix March 7, 2011 at 6:53 pm

I think I have all of you beat.
I work for a really big company. 1/2 million employees. And I think I have the worst 401k plan I have ever heard of.

the company will match 35cents to a dollar, up to the first 6% of….
no! not my salary, but my 401k contribution!!!

has anyone heard of something like this? I think it is a symbolic match!

7ate9 March 19, 2012 at 11:22 pm

@B7 You are the first person I have come across in my 10 years of investing research that has said index funds suck. So in turn, then the entire market itself is a wash and is not worth investing in? Money market funds? They have expenses too.

I am to assume you would not participate in any retirement plan at all, and keep your money in a taxable, low-yield bank account.

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