According to the New Webster’s Dictionary, the definition of stupid is:
Stupid: “Someone who is age 59 ½ or older, and who is eligible but not contributing to their 401(k) plan where the employer offers a matching contribution.”
Well, this isn’t actually what Webster’s says, but it could be one definition. Most employer 401(k) plans pay a matching contribution of 50% up to the first 6% on employee compensation. So if you make $50,000 and contribute 6% of pay to your 401(k) ($3,000), your employer would match with a $1,500 contribution. This is free money and is the equivalent of an automatic 50% return on your investment. There is no other investment that will yield you this high a return. While you should take your employer up on this free offer no matter what your age, it is especially important to do so if you are over age 59 ½. At this age, there are no longer any penalties for early withdrawal. If you are younger than age 59 ½, the federal government would charge you a 10% penalty. Also, at this age, you’re likely to be close to retirement and the next few years will be your last opportunity to accumulate a significant amount of money.
Studies suggest that some 30% to 40% of eligible employees do not participate at all in their employers’ 401(k) plans. And, of those who do participate, as many as 40% don’t contribute enough to fully take advantage of the employer’s matching contribution. Why are workers so willing to leave this free money on the table? The two most common excuses I hear are:
1. “I can’t afford to contribute.” To this I say, “If not now, when?” There is never a good time to start your retirement savings program. I have been working with people and their finances for over 30 years and I have never found an instance where a client couldn’t cut expenses by 10% or more. If you decide this is a priority, you can find a way. One simple strategy is to divert all pay raises into your 401(k) plan until you are at the maximum allowed.
2. “I don’t understand investments”. Many 401(k) plans offer a ‘Lifestyle’ option, which means that all the investment guesswork is professionally handled for you. These lifestyle funds become progressively more conservative as you approach the normal retirement age. The investment manager makes all of the investment decisions for you including rebalancing your portfolio as needed. If your plan does not offer a lifestyle fund, suggest to your employer that it does so. Also, ask your Human Resources Department to have a 401(k) representative meet with you to discuss your options. You won’t be able to get individual investment advice but you’ll be able to get useful information about your plan and its specific choices.
Participation in 401(k) plans is so low yet so important, that Congress is considering getting involved. Current proposals include requiring companies match employee contributions dollar-for-dollar for the first 3% of pay and fifty cents on the dollar for the next 2% of pay. Proposals include a ‘saver’s credit’ for low-income participants whereby the government would reimburse eligible participants for making a contribution. Corporations are also proactively addressing the problem of low participation by enacting ‘automatic’ 401(k)’s. Under this feature, an employee is automatically enrolled in the company 401(k) plan when he or she becomes eligible unless the employee ‘opts-out’ by giving written notice he or she does not want to participate.
It’s a sad state of affairs that our government and corporations must go to such lengths to get people to do what they already know they should. Least you find your picture in Webster’s dictionary under “stupid”, make sure you are investing enough to capture your employer’s 401(k) plan matching contribution!