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  • Writer's pictureHugh F. Wynn

To Contribute or Not? That Is the 401(k) Question

I frequently encourage folks to optimize their 401(k) match opportunities. And I believe it’s incredibly good advice. Think of it this way. For those “specific” dollars your employer matches, you receive FREE MONEY, a 100% return on your investment.

Those who routinely read my blogs (both of you) know that I frequently encourage folks to optimize their 401(k) match opportunities. And I believe it’s incredibly good advice. Think of it this way. For those “specific” dollars your employer matches, you receive FREE MONEY - a 100% return on your investment. Yes, I know, a less than dollar-for-dollar match is the more standard match, reducing that 100% return, but I think you get the gist of what I’m saying.

Why Not?

Question is, why not?

If you qualify for an employer match, it provides a great retirement savings advantage over those employees who forego or aren’t blessed with the opportunity to participate in a matching program. But a lot of people do not participate for varying reasons. Quite a lot of folks work for companies that don’t offer a 401(k) plan. And many companies don’t allow new employees to participate during varying lengths of probation. Still other employees are eligible to participate but choose not to. In fact, studies indicate that a third or more of eligible employees simply opt not to contribute to their employer’s 401(k) plan.

For answers, I go to Vanguard, my low-cost investment advisor of choice that manages thousands of 401(k) plans for employers. They publish detailed information annually in their How America Saves report using data from millions of plans to provide an understanding of why certain employees don’t participate in available plans. By the way, Vanguard is low cost because the company is owned by its shareholder-owned funds (no outside investors other than those shareholders).

Lost Time

Most large employers offer a match to their plans. Only about a half of smaller employers do. The fact that some employers don’t offer a match is often misunderstood by new employees to mean “contribute only if the employer offers a match”. Don’t make this mistake. This can lead to valuable time lost NOT contributing to a retirement plan in the interim. And as you know, lost time equals money not compounding in future months and years. But as mentioned above, even when an employer offers a match, not all new employees are immediately eligible to participate. Many plans – up to 40% of both large and small employers – require a year of service (probation, if you will) before receiving the employer match opportunity. Mark your calendar. When probation ends, hop aboard the FREE MONEY train.


And there’s that other pickle. Even after an employee becomes eligible and chooses to match, employers frequently require that new hires remain with the company for a period of time before the match becomes the employee’s to keep… called vesting. That’s right, only around 40% of “large plan” employees are eligible to retain the match at the point of receipt. Those who depart the company within a particular timeframe stand to lose part or all of the match. Smaller companies are more generous. Competition, I suppose, dictates that upwards of 70% of employees in “small company plans” retain their match from the point of eligibility.

Low Income Factor

If a plan offers no match at all… or if there is a waiting period… or if all or some portion of the match might be forfeited, such factors DO impact the participation rate. In fact, they encourage many employees not to participate in their company’s 401(k) at all. Still, in many cases, these may not be the primary reasons for non-participation. Like so many other things in life, matching is a dollars and cents exercise. Consider for a moment an employee’s financial ability to participate in a plan.

With both large and small 401(k) plans, participation rates increase along with employees’ salaries. No surprise here. Conversely, the lower the income, the lower the participation rate. When a family breadwinner needs every penny of income to provide for life’s necessities, that employee simply can’t afford to contribute to a 401(k) even in the presence of generous matching rules. Under normal circumstances, higher-income workers go out of their way to collect every penny of an employer match. Lower-income folks, those with the greatest need for financial assistance, often leave this FREE MONEY on the table. Unfortunately, losing out on a 401(k) match is only one of many hurdles facing them. It’s expensive to be poor.


Failure to take advantage of matching plans makes sense only in the affordability instance. Otherwise, to not participate borders on imprudence. It truly is FREE MONEY… truly a 100% return on those “matched” dollars. And if affordable, eligible employees should start contributing to their employer’s 401(k) plan on day one of employment. Don’t wait until becoming eligible for matching (if a waiting period is involved). Those unmatched contributions add up and their yields compound, too.

You’ll be glad you did.

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