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401(k) Match: Free Money?

Try a Google (NASDAQ:GOOG) search on "401(k) Match" "Free Money" (including the quotation marks). You'll hit the jackpot with hundreds of hits. Try the same search at the Fool (this time with no quotation marks). Bingo again!

Employees are repeatedly urged to invest in their 401(k)s, at least up to the company match, because (the choir swells in unison) "the company match is free money." That's about as close to infallible gospel as you'll find in Fooldom.

There's just one problem with the free-money evangelism: It's not winning over many new converts.

Research published last year by human resources firm Hewitt Associates (NYSE:HEW), based on 401(k) statistics for more than 2.5 million eligible employees, showed little increase in participation over the previous year. The study found that approximately 30% of workers are not participating. For workers ages 20 to 29, the number rises to a staggering 54%. Of those who did participate, more than one in five (22%) did not contribute enough to receive the full company match.

Reversing the message
Let me offer a wild and crazy hypothesis: The "free money" scripture doesn't work because it's the wrong message. Please hear me out before you report me to Fool authorities. Yes, everyone should invest at least enough to get the match, but not because the money is free. On the contrary, those are dollars you've earned. If you turn your back on matching funds, you're rejecting a key part of your Total Rewards package, which includes all salary, bonuses, and benefits. None of these comes free; you've worked hard for them!

"Come on, Doug," you say, "quit nitpicking. Calling the company match 'free money' is a figure of speech to make a point."

And that's my gripe. I believe the "free money" mantra is precisely the wrong point. It contributes to an unconscious attitude that masquerades the mistake of passing up the company match by reinforcing "mental accounting" -- the name given to a common category of money miscues. People tend to place different values on money depending on its source. Consider this example: Next week you receive $1,000 from one of the following:

(1) lottery winnings.

(2) tax refund.

(3) annual bonus.

(4) compensation for working overtime.

(5) normal paycheck.

Now, rearrange the sources in the order of the likelihood that you'll whip out your credit card a few more times over the following month for splurge purchases. Most people would make little or no change to the original sequence. The principle at work is that unexpected or unpredictable money is easier to spend. It's fun money.

A dollar is a dollar is a dollar
For most of us, the regular paycheck is largely allocated to routine living expenses and creates a baseline for our attitudes about spending. We're prone to viewing money from other sources as spendable in ways that bypass financial good sense. But the source of funds should not influence our priorities for spending. As behavioral economists love to point out, all dollars spend the same. When you take your bucks to Starbucks (NASDAQ:SBUX), you get the same Cinnamon Dolce Latte, whether you found the money in the street or earned it paving the street.

Here's another example: If you get a $1,000 refund from the IRS, what's your response? "Darn, we gave Uncle Sam an interest-free loan of $1,000! Let's put this in our IRAs." Or "Whee, mad money, honey! Let's party!" A moment's reflection should trigger the realization that you worked as hard for the withheld $1,000 as for same amount spread over a year of paychecks. So which is it? All dollars spend the same? Or easy come, easy go?

Are eligible employees who skip the company match passing up free money? Not really. And they would more likely participate if they viewed the match as a component of their earned wages. Rather than "easy come, easy go" free money, it's a key part of their compensation that could one day mean the difference between the good life and just scraping by.

The bottom line
If you're a fellow Fool, you're doubtless already getting your available 401(k) match. But what about your friends, family, and coworkers? Consider forwarding this article to anyone you know who's ignoring this hard-earned benefit. Just click on the "Email this page" link near the bottom of the page.

Put your defined benefits and other savings strategies in order by taking a 30-day free trial subscription of ourRule Your Retirementnewsletter service. Our team of experts is ready to answer questions and suggest ways to guarantee a gleam on your golden years.

As a kid,Doug Short never played with matches, but he believes in playing 401(k) matches for all they're worth. While he owns no shares of the companies mentioned, he's pleased to mention that Starbucks is a Motley Fool Stock Advisor pick. The Motley Fool's disclosure policy is also totally free

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