Reader Responses to My Pathetic 401k

by Kevin on February 18, 2009

Let me start by saying that I love when my readers disagree with me. Now getting into arguments at every turn can be a bit daunting (to say the least), but when people challenge your beliefs you have two options: concede their point or bring up evidence that reaffirms your belief.

It’s called critical thinking.

Yesterday I told you that I thought my 401k plan was pathetic. I’m hoping it doesn’t somehow land on a higher up’s desk and get me fired. And I would hope the company would be open to some constructive criticism — so if you are a higher up at my company, read this: increase the 401k match. Duh.

At the bottom of the post I asked readers to chime in with their thoughts. What were other 401k plans out there like?

Some of the challenges to my point of view were valid, as you will see.

Here are some of the responses I got along with my response as comments back on the original post. (I always try to respond back to individual comments with a comment so that everyone can see the discussion going on):

Glen

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.

@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

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.

@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

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.

@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 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.

@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 Money

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.

@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

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.

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

Ricky

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…

@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.

ObliviousInvestor

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.

@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 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.

@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

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.

@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

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…

@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

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.

@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.

* * * *

Awesome discussion. Thanks to all of the commentors for contributing to it. Keep it up!

{ 9 comments }

ObliviousInvestor February 18, 2009 at 9:02 am

Hi Kevin-

Neat idea to do a followup post about reader feedback.

And you’re right, the job switch was the result of “other benefits.” Namely, now she has a job she actually enjoys, hehe.

Budgets are Sexy. February 19, 2009 at 1:27 pm

Great idea bro, this was pretty interesting to see 🙂 I’ll have to admit that I have the opposite situation @ our company – our matching is TOO good! haha….

100% matching on 100% that we put in (vested asap) up to the legal limit each year! And can you believe some crazies don’t even participate? freaks me out…FREE MONEY like woah up in here – gotta take advantage of it, even if you can only afford 2 or 3%.

alright that’s all i wanted to say. don’t want you to beat me up 😉

Kevin February 22, 2009 at 12:00 am

@Oblivious: And I’m betting that “fringe” benefit was well worth the switch, eh?

@Budgets are Sexy: WOW. Where the heck do you work?! Sign me up! You should teach a class on why people should invest in it, even if it is just a little bit of money. Ever consider that?

J. Money February 22, 2009 at 12:13 am

one of the perks of working for a tech start up 😉 yeah dude, if i knew more about the investing part i’d totally be up for teaching a class or two…but for now I just speak my mind on blogs – more people would probably learn from that anyways, eh?!

Kevin February 22, 2009 at 4:03 pm

@J.Money: As long as the tech startup does well, that’s sounds great 🙂

You will learn more as you go of course. Then you can help others.

The Weakonomist February 22, 2009 at 6:50 pm

First of all, great job putting this new post together.

Second, yes I can sell my stock at any time. I dump all my shares each time the total value is 5% of everything in the 401k.

Russell Fascenda February 23, 2009 at 4:56 pm

None of them are anything like the defined pension plans of old, but as somebody said there’s no obligation for the company to offer a 401(k) type plan either. Although you’re right it’s a benefit that can attract or repel potential employees so it’s an advantage for the company of offer this.

And there is that other element that was mentioned yesterday, that the executive plans are limited by the amount of lower level employees participating (their has to be a sharing of the wealth, so to speak).

I’ve been in good ones and bad ones, yours is probably average, especially in current time when many are eliminating the match. Are you fully vested on the day of the contribution? It used to be common that you were only 20% vested per year of service so you had the possibility of not getting your share.

Kevin February 25, 2009 at 8:32 am

@The Weakonomist: Good plan.

@Russel: That is one good part of our plan. I am fully vested from Day 1. My previous employer had the 20% first year, 40% second year, etc. Garbage.

Russell Fascenda February 25, 2009 at 8:42 am

I can see two elements to the vesting, one is giving incentive for you to stay with the company.

The other is that they gain that balance between benefit for highly-compensated employees and lesser employees, but doesn’t necessarily cost the company because it can be held back through the vesting.

There are a lot of different rules for the balance of HCE and lesser employees, and I’m sure just as many tricks to make it legal at the least cost. I’m sure vesting came into being during the old-style pension plans, where it makes sense, and somebody said “hey can we do that with the 401(k) money”?

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