What Percentage should You Dump into a 401(k) or NOT?

My common-sense view is that if a retirement savings vehicle is good, it is good, PERIOD! It doesn’t become good simply because of some DISCRETIONARY matching by an employer. So, the entire buzz about 401(k) plans being “awesome” – due to matching employer contributions - is frankly nonsense. What if the matching stops? My guess is they suddenly become atrocious.

I am startled by the fact that, an overwhelming majority of conventional financial advisers are telling people to simply sign up because of matching dollars. They claim that if, for instance, you contribute $1 and receive a $0.50 matching, you have a 50 percent return. The truth is you have $1.50 earning interest (assuming your portfolio does not take a spanking). The BIG ILLUSION, however, is that you are receiving a 50 percent return on your money – That’s NOT exactly true.

It is only your principal that increased 50 percent, but the interest rate from that point forward is whatever your portfolio earns. Your account does NOT compound at a 50 percent return annually.

Today’s Matching Environment

I know there are employers still matching employees’ contributions. However, more and more, companies, including names like, Kodak, FedEx, General Motors, 7-Eleven, Ford, Eddie Bauer, U.S. Steel, Motorola, Saks Inc., Sears Holding Corp., Frontier Airlines, Cushman & Wakefield, Chrysler (and the list goes on) have announced plans to either change or suspend matching contributions to their 401(k)s. – So, now what?

True Matching

In my opinion, true employer matching is:

1. Where an employer contributes a certain percentage of an employee’s gross income to a 401(k) (or whatever qualified plan) REGARDLESS of whether the employee is contributing anything - and it is 100 percent vested.
2. Where an employer matches dollar for dollar on a certain percentage of an employee’s contributions.
3. Where an employer provides 50 percent matching benefit on a certain percentage of an employee’s income.

I know you’ve been waiting - here is my general rule of thumb:

All other things being equal, an employee should not contribute any funds to a 401(k) plan beyond the amount required to receive true matching employer contributions. For example, if the same yield can be achieved in a non-qualified retirement account (that is income tax-free on the back end), I would generally advise an employee to contribute to a 401(k) plan only up to the amount that receives true employer matching.

Before making such a CRITICAL decision (about your retirement), I would advise you to carefully consider a variety of factors such as: yield, available portfolio choices, strings attached (or flexibility), as well as tax implications (which greatly impacts the net spend-able retirement income) among others. After all, you are planning for retirement. So what should the focus be? I would think number one on the list should be a plan that will provide the most spend-able retirement income.

Almost on a daily basis I talk to people who are already in retirement or very close. And, they overwhelmingly echo the fact that, if they had known the entire story (if they had received clear, understandable, full disclosure information), they would have made different choices regarding their wealth accumulation vehicles.

I am going to tell you the often untold portion of the retirement story (in the coming weeks). My hope is that you’ll take the necessary action before it turns out to be too late.