Money at 30: Walking Away from 401(k) Matching Funds
Lately there’s been a lot of talk about 401(k)s in the news. While the topic of retirement accounts is nothing new for personal finance sites like this one, it is a bit odd to see so much hubbub about them in mainstream media and, perhaps more importantly, Twitter. In case you don’t know, all of this commotion is about a proposed change that would or would not (depending on who you ask) affect Americans’ retirement savings. So while everyone is freaking out over their 401(k), I thought I’d hit on a retirement account dilemma my wife and I recently experienced as she considered the potential of a new job.
As I’ve written about in the past, one of the best ways to boost your retirement savings is to max out the free money you can earn from employer matching. Of course one of the strings that comes attached to this otherwise awesome arrangement is that there will typically be a vesting period before you can actually call these bonus funds your own. For example some employers offer what’s known as a graded vesting in which you might be entitled to 20% of matching funds after one year of service, 40% after two, etc. Meanwhile others practice cliff vesting where you might not be vested at all until after a few years, at which point you’d go from 0% to 100%.
With that in mind, the question then becomes: when does it make sense to walk away from those matching funds? Here are a few scenarios:
When you’re going to make significantly more money
Perhaps the most obvious reason you might consider leaving one job for another is for more pay — even if it means leaving behind some of your 401k funds. After all, if you’re making more money, you’ll be able to contribute more to your 401(k) and hopefully make up for those forfeited matching funds quickly. To give you a basic idea on if it’s worth it, first consider how much in matching funds you’d be bidding adieu to and how long it would take you replace those funds given your new salary and your contribution percentage. Should you go through with accepting the new position, you might also consider upping your contributions to account for your raise.
When your new employer matching is significantly better
Now we get to the scenario my wife recently faced: she came across a job listing that seemed to offer a lot of the perks we’ve been looking for. Among those benefits was a 401(k) program that offered dollar for dollar matching up to 6%. That’s a huge difference from her current employer’s plan that caps matching at 2% (and only at 50 cents on the dollar).
Complicating the equation was the fact that she’d not only have to kiss 60% of the matching funds she’d accrued so far goodbye, but would also have to take a cut to her hourly wage. Even then, it seemed like that 6% matching would actually win out in a mathematical sense. Alas there were other elements that dissuaded her from pursuing the position, but the entire episode did inspire considerable contemplation on the importance of 401(k)s and employer matching when it comes to accepting a job offer.
When you have a better opportunity
Sometimes opportunity and money are only tangentially related. Therefore you may find yourself in a situation where potential long-term gains are worth some short-term sacrifices. Among these sacrifices may be your unvested matching funds. In these instances, everyone’s experience will be different and there’s no “one size fits all” solution. Ultimately you will still need to calculate whether the gamble is worth it, but this time be sure to include the value of opportunity in your calculations as well.
There’s good reason why any perceived threat to person’s 401(k) would be cause for alarm. Afterall, for many Americans, such accounts are an essential tool for their retirement. Similarly many employees rely heavily on their employer’s matching funds to help them reach their savings goals. However, depending on your offered salary, the matching offer of a potential employer boasts, or the overall opportunity presented to you, there may be times when it makes sense to walk away from these unvested matching funds (AKA “free money”). Just be sure to think carefully about your decision and choose the path that makes the most sense for your finances and your happiness.