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?

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