Yesterday, GM announced that it would be suspending the company’s matching contributions into its employees’ 401(k) retirement plans starting November 1 and lasting until financial conditions improve. For people like me who make their living working for a corporation, the 401(k) match is practically expected.
One way to look at the company match, if dollar for dollar like the plan offered by my employer, is as if it were an immediate 100% return on your money. There’s no sense in turning down a guaranteed doubling of your money, so it makes sense to choose to contribute to your 401(k) at least enough to receive the maximum match.
After that, if the investment options are good, it’s a good idea to contribute as much as possible. I’m working at investing in my 401(k) to the maximum amount allowed by law, but it looks like I’ll fall short this year. I’ve decided to invest beyond the maximum match offered by my company, 4% of my salary.
If those who make these decisions at my company were to announce that the employer matching contribution would be suspended, I would probably continue investing in the 401(k) for the tax benefit, half in a traditional 401(k) and half in a Roth. But if I didn’t have extra income, I’d probably be investing only 4% of my salary, taking advantage of the maximum company match and nothing more. Without the company match, I would have a tougher choice.
My investment options in the 401(k) are mediocre at best. Expense ratios are high, and I’d prefer index funds rather than managed mutual funds. But in the end, it still makes sense to invest in a 401(k), rather than invest in a regular brokerage account, thanks to the tax advantaged status. In a regular brokerage account, you’ll have to pay taxes on your gains in addition to having less to invest with in the beginning after tax.
This also assumes that you will be in a lower tax bracket when you retire, which may not be the case considering your goal is to have as much retirement income as possible and the fact that low tax rates and high national debt now may mean higher tax rates all around in the future.
Would you invest in your 401(k) if your company stopped matching a portion of your contributions?
Photo credit: femaletrumpet02
Updated January 16, 2010 and originally published October 24, 2008.