Friday, February 12, 2010

Many companies that have stopped matching employees' 401(k) contributions when the economy tanked, are now thinking about renewing these matching contributions. My wife's company is one such employer, and there is talk that the company will begin matching contributions again in the coming months. In such a situation, should you stop your contributions until the company renews its matching or should you stick to your guns?

The benefit of delaying contributions is obvious: wait a few months and the same money that you would contribute now with no employer matching will yield a guaranteed return in the form of employer moola... However, there are a few arguments I can think of against this strategy. For one, unless you know for sure that your company will be renewing the match, you are delaying contributions that could be invested in the market and yielding a return (assuming the market goes up, that is). For another, if you delay your contributions, will you have the discipline to max out your retirement savings for the year when the matching actually begins, or will you leave money on the table? There is also the question of how matching is to be calculated. Many companies limit matching to a percentage of employee pay in a given pay period, meaning that stacking all your contributions may not give you the desired bump in employer matching funds.

My wife and I discussed the option of delaying her contributions, but have not yet made a decision. Any opinions or suggestions?

My company has never matched employee contributions, nor is it likely to do so in the foreseeable future. Let's just say that for now I am happy to have a steady paycheck... :-)

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1 comment:

Revanche said...

I'd continue to contribute since a) you have no way of knowing when/if the company will continue the contributions and b) you might as well continue at least adding your contributions.

Yes, the employer match is free money, but why opt out entirely of the retirement plan just because there isn't any matching?

I saved the bulk of my retirement money without a match because my company didn't match contributions for 3.5 years of the 4.5 that I worked for them. It's still a tidy sum and I benefited from the tax advantaged account despite the lack of matching.