You Can Complain About Your 401(k) or You Can Save More

“For as long as I can remember, compound interest has been at the center of my own investment thinking.” – John Bogle

Bloomberg had an article last week that took many large companies to task for skimping on 401(k) benefits and making things harder on their employees.

Some companies are now making annual lump sum contribution matches instead of periodically taking contributions out of an employee’s check each payday.  This takes away some of the benefits of dollar cost averaging and being exposed to the market throughout the year.

Others are making the vesting periods longer until you can enter your employer’s plan. Another problem is that certain companies have lowered their company match to save money.

The Bloomberg article explains the difference between a 3% company match and a 6%  match on your ending balance:

A few percentage points up or down can make a huge difference come retirement day. A 25-year-old worker with a starting salary of $25,000 whose employer matched 3 percent would see his or her 401(k) balance reach about $624,000 if he or she saved consistently until age 65 and got 6 percent annual returns, according to calculations by Jack VanDerhei, research director at the Employee Benefit Research Institute.

All things being equal, that person would have about $812,000 — or 30 percent more — if his or her company matched 6 percent. The analysis assumes an annual wage growth of 3 percent so the worker’s ending salary at age 65 is $81,550.

It’s obviously true that a higher match is better than a lower one. And you could take this to mean your company is screwing you over with a terrible 401(k) plan (which is a strong possibility).

But I look at this another way — if you save just 3% more of your salary every year it could make a huge difference.  Over the course of the 40 year career in this example, 3% more each year turned into nearly $200,000.

The compounding snowball takes care of most of the work as long as you are diligent and continue to put away money year after year.

I wish more companies would take better care of their employees, especially when it comes to something as important as retirement savings.

My best case scenario would be for the government to make the Thrift Savings Plan available to every employee to make things easier and more cost effective (read: The government actually does something right: Retirement).

But alas, we have to play the cards we’re dealt instead of complaining about the way dealer shuffles the deck.

This is also a good lesson in looking at total compensation when considering a job offer.  Most potential employees simply look at their salary when excepting an offer and nothing else.

Ask about the full benefits package including healthcare coverage, vacation time off, work/life balance and the full retirement package.

These benefits don’t show up in your salary but they can make a huge difference on your finances.

Companies squeeze 401K plans from Facebook to JP Morgan (Bloomberg)


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