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  • Mark Nicholas

When a 401(k) Match Isn't a Benefit

Your 401(k) match isn't always the "free money" that you hear about.

For decades, employer matching contributions have enticed employees to contribute to their 401(k) plan to get the "free money." On the surface, it's appealing. If I contribute $1 and my employer contributes $0.50 on top of that, it would seem that I've just experienced a 50% return on my investment (subject to vesting, of coarse). It may even seem foolish to not take advantage of your employer's matching contribution.

In a recent survey of 1,233 401(k) plans of small businesses in Northeast Wisconsin, nearly 15% of those plans have administrative expenses equal to or exceeding the amount of employer contributions! That's a truly staggering figure when you consider that investment expenses aren't included in the administrative expenses and that 172 plans didn't report any expenses (in my experience, those tend to be due to high expense funds). In my estimation, roughly 1 in 3 small business 401(k) plans in Northeast Wisconsin are inefficient savings vehicles as currently structured.

Why does this matter? When the expenses charged to the plan exceed the amount of employer contributions, every $1 that you deposit will buy you less than $1 in savings, even after you take into account the employer match. That "free money" you thought was a great benefit is flying out of your account as fast as it's going in, and it's taking some friends with it as it leaves. If you're in one of these plans, you'd be better off opening an IRA and using that as your savings vehicle than putting additional dollars into your 401(k), even with the match! The arguments against IRAs is typically that mutual funds carry higher expenses and that advisers charge high fees, but both of those are easily mitigated.

If you sponsor one of these plans, a SIMPLE IRA may be a better deal for you and your employees, eliminating administrative headaches and high costs. If you want to keep the 401(k) because it's what employees expect, there are alternatives that can make the plan more cost efficient for participants to drive the benefits that you expect to your employees.

If you're in a plan that offers employer contributions that aren't entirely offset by the expenses, keep taking advantage of the benefit! When it's structured well, it's a great tool. If you need help determining whether you're keeping your match, contact us and we'll help you sort it out.

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