Retirement: Could Your Employer’s 401(k) Match Actually Be Hurting Your Savings?

Wooden block with the number 401K with some money around.
Marvin Samuel Tolentino Pineda / Getty Images/iStockphoto

A 401(k) plan is one of the best ways to stockpile money away for retirement. Funds contributed to an account can be deducted from your taxable income and you can grow your savings over time through the investment.

But perhaps the biggest motivator to contribute to a 401(k) plan is an employer’s match. Company contributions to employees’ funds based on formulas can grow a worker’s savings significantly over time.

However, while employer-sponsored 401(k) matching contribution plans are generally a valuable benefit, there are situations in which they might not be entirely advantageous for all workers.

Deflating Future Retirement Savings

Withdrawing your 401(k) savings when you leave a job will significantly impact your future savings. According to a study entitled “Cashing Out Retirement Savings at Job Separation,” researchers Yanwen Wang, Muxin Zhai and John Lynch Jr. found that over 41% of employees cashed out part of their 401(k) contributions when they exited their companies, rather than investing their savings into an IRA or another employer plan.

And most of those who cashed out took all their savings out. Sixty-four percent of those who cashed out emptied their 401(k) in one withdrawal and 21% took their savings out with two or more withdrawals. Additionally, many borrow from their 401(k)s while they are employed, despite their better use as lasting investments.

High Fees and Early Withdrawals

Some 401(k) plans come with high administrative or investment fees. If the fees are excessive, they can erode the potential gains from the employer match. In such cases, it might be worth considering contributing only enough to get the full match and investing additional savings in a lower-cost investment vehicle.

If you choose to make a withdrawal from your 401(k) before age 59 and 1/2, there are some things you need to keep in mind. Assuming you need the money immediately, you need to realize that taking your money out early means you’ll get less than what you earmark for withdrawal in the first place because of the penalties imposed by the IRS.  

Are You Retirement Ready?

Immediate Financial Needs

In some cases, employees might face immediate financial needs, such as medical expenses, housing repairs or educational costs. If contributing to the 401(k) means neglecting these more pressing needs, it might be better to address the immediate financial concerns first.

Limited Investment Options

Most 401(k) plans have limited investment options, and these options might not align with an individual’s investment strategy or risk tolerance. In the case of a 401(k) investing in a risky mix of volatile stocks, bonds and mutual funds that perform less satisfactorily than your expectations, it might be a better idea to contribute to alternative retirement accounts with a broader range of investment choices than those chosen by employers.

Debt and High-Interest Loans

According to Northwestern Mutual, the average American holds around $21,800 in high interest credit card and loan debt. This is less than recorded before the pandemic but still significant. If you have high-interest debt, such as credit card debt, it might make more financial sense to prioritize paying off that debt before contributing more to your 401(k). The interest on high-rate debt is often crippling, and can often exceed the returns you might earn in your retirement account.

Short-Term Employment

A job isn’t always necessarily a career, and now more than ever workers are choosing to job hop to better employment. If you anticipate leaving your job in the short term and your employer’s matching contributions are subject to a vesting schedule, you might not have enough time to fully vest in those contributions. Vesting schedules can limit the immediate benefit of employer matches for employees with short tenures.

Are You Retirement Ready?

The temptation to cash out your 401(k) can be strong. Wang, Zhai and Lynch Jr. speculate that people often tend to think of money matched by an employer as a windfall rather than money earned and that needs protection and investment care.  

In lieu of employers providing financial education or separate emergency savings account options, it’s up to you to learn the specifics of your company plan and use the money saved in the best possible way should you leave your job.

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