Don't Pass up Free Money in a 401(k)

Ok, this may be a needless post -- after all, if you regularly read Free Money Finance, then it's likely this is a no-brainer for you -- but when I saw the article, I just had to post about it since it's such a basic tip.

The article from MoneyCentral starts with a very basic overview:

You may be passing up hundreds or thousands of dollars in 'free' money from your employer if you ignore a 401(k) plan. Here's why you should act now, plus some tips for 401(k) beginners.

The article then asks a very simple question and gives some startling revelations:

Who'd pass up "free" money? More people than you might think. Nearly a third of American workers fail to take advantage of 401(k) plans. Never mind that employers typically match a worker's contributions with hundreds or thousands of dollars a year. Never mind that employees don't have to do anything to qualify other than stash money away for retirement. For a variety of reasons, including inertia and ignorance, many workers don't take the perk.

Even of those who do sign up, about one in five doesn't contribute enough to meet their companies' full match, according to a new survey by the Hewitt Associates human resources firm.

Young people are especially stubborn, with just 46% of workers under 30 contributing to 401(k)s, according to the Hewitt Associates survey, which examined the investing habits of more than 2.5 million Americans who have the investment option at work. The rest miss the opportunity to save money, tax-free, until the IRS comes calling during retirement.

"Procrastination is what we're seeing in people who are waiting," says Lori Lucas, director of participant research for Hewitt Associates. "We see consistently that people do recognize the importance of saving for retirement, but they thought they couldn't afford it, or they were worried about the market, or they thought they had time to get to it later."

Here's what these people are missing:

American companies often match half of what an employee contributes -- up to 6% of his or her salary. A worker making $50,000 a year, for example, could divert $3,000 into a 401(k) and add an extra $1,500 to it, courtesy of the company. Frequently, however, "workers don't see it in the same way as their employer offering them the same amount as a 3% raise," says Amy Reynolds, a consultant with Mercer Human Resource Consulting.

Here's what the article suggests for 401(k) beginners:

• Max out your employer match. The average match is 50 cents for every dollar an employee contributes, up to 6% of your salary. For an employee making $50,000 a year, that's $1,500 in "free money toward your retirement," says Revare.
• If you can't afford to contribute, set up an automatic savings increase plan that adds 1% of your salary to your 401(k) each year until reaching the max.
• Reevaluate your 401(k) holdings two to four times a year, or every time a major life event occurs, such as the birth of a child, a child entering college, or a career change.
• Minimize allocations in company stock. One-third of all companies use their own stock as part of the matching contribution feature, according to a recent Hewitt Associates study. "Keep no more than 5% in your company stock -- since 100% of your earnings are tied to the company's welfare already," says Revare.

Good, basic, simple advice that will help you increase your net worth dramatically throughout the years.

Update: Linking to the Beltway Traffic Jam.

Comments

[geoff]

I especially liked that last bullet point. That sound advice that I wouldn't have immediately considered. Something to keep in mind if I find a job that offers a 401(k).