How Stingy Company 401(k)s Can Cost You Half A Million

money blowing away

If you work for the wrong company, your potential retirement nest egg could be “Gone with the Wind.”

Can picking the wrong company to work for really cost you half a million dollars?

A 401(k) expose by Bloomberg BusinessWeek shows exactly how it can happen. Choosing the right company can mean almost $500,000 extra in your pocket at retirement. Choose the wrong company and your half a million could be doing its best imitation of “Gone with the Wind.”

Which company would you rather work for?

Shortly after finishing college, Karen is thrilled to land a job.  At age 25, she starts off with a $31,000 salary, and gets a 3% increase each year. She contributes the average amount of salary to her 401(k) given her age, earns 5% on her portfolio each year, and works until age 65.

If she works at science innovator Dupont (which offers a generous 6% match plus a 3% bonus contribution), she’ll end up with $999,231. That’s a pretty good retirement nest egg.

But if she spends her career at casino resort operator Wynn Resorts (which caps the company match at a skimpy $500 per year), her retirement kitty will hold only $504,684.

Same employee, same salary, same 401(k) contributions, same investments. But an almost $500,000 difference in what she’s able to accumulate!

The only difference is the employer.

How does this happen, and what can you do to stop your 401(k) from doing a disappearing act?

Lesson #1. The company you work for, and its generosity when it comes to its retirement plan, can make or break your plans for a timely retirement.

“A difference of 3 percentage points on a matching contribution can add up to hundreds of thousands of dollars over the course of a career,” write Carol Hymowitz and Margaret Collins in

Lesson #2. It could be worse. If your company offers no retirement plan at all, you completely lose the ability to deduct your contributions, except for a skimpy IRA.

You can still save (and should!) for retirement, but it will be like running the same race … only uphill.

This is the worst case scenario we see with clients. If you are a W-2 employee, and your company offers no retirement plan, you’re limited to a scrawny $5,500 per year IRA contribution. You can still save on your own, but there’s no deduction beyond the IRA.

(Note: If you’re actually an independent contractor, paid by 1099, you’re in luck and can set up your own plan. We’ve had great success setting up very generous retirement plans – usually with little or no overhead costs — for our self-employed clients).

Lesson #3. Of course, even if they offer a great plan, you can still lose out if you fail to sign up, don’t max your contributions, or invest poorly.

The trick is to accumulate as much as possible – as soon as possible – just in case your health gives out, you’re laid off, or you end your career early. Don’t play the woulda-coulda-shoulda game. Get a strong start as soon as you’re out of the gate. Those contributions you make in your 20s and 30s will compound tax-deferred for sixty years or more. Put in the max, invest for the long-term, and block out the market “noise.”

Lesson #4. Don’t take it lying down.

Your 401(k) is now the cornerstone of your retirement finances. If your company doesn’t offer one, speak up. In the past, we’ve given clients some talking points to raise with their boss, and fortunately, they convinced them to add a retirement plan to the benefits line-up. Some plans are free to administer, involve no expensive or complex “testing,” and require only small employer contributions (about the size of a typical cost-of-living increase). If your company won’t let you plan for your own retirement, maybe it’s time to vote with your feet, and seek more enlightened employment elsewhere.

 

 

 

About Mari Adam

Mari Adam, Certified Financial Planner™ and President of Adam Financial Associates Inc, has been helping individuals and families chart their financial futures for over twenty-five years. Have a question about your financial situation? Ask Mari!

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