Man, that really was easy! Photo credit: Wang Shein
If your job has a benefit package, you may be eligible to participate in some sort of employer-sponsored retirement plan where your employer will match your contributions up to a certain amount.
There are all kinds of reasons why people don't fully participate in these. Maybe you think you can pick investments which will perform better. Maybe you don't like being limited to the selection of funds your employer offers. Whatever the reason, get over it! Here's why full participation in a 401(k) is almost always a good idea.
Employer match
According to one survey, almost 90% of companies that offer a 401(k) plan provide some kind of match of employees' contributions up to a certain percentage of their salary (6% seems to be the norm). Of these, 68% match at least half of the employees' contribution, and 10% match 100% or more. With some companies, the matching percentage depends on longevity – in other words, those who have been with the company the longest get a more generous match.
Don't let your ego take your free money
One of the most common reasons for not participating in a company-sponsored retirement plan is the lack of investment choices. Generally, employers offer a handful of funds to choose from, and participants can allocate their money among them. Many investors feel they would be better off taking that 6% of their salary, opening a brokerage account, and investing it into whatever stocks, funds, or bonds they see fit.
While you may indeed be able to achieve better returns on your own, don't think for a minute you can consistently beat the returns of index funds plus your employer's contributions. The odds are simply not in your favor
Consider an example
Let's just say the index funds offered by your employer average an annual return of about 8% per year, and that by picking your own stocks you can achieve 10% gains each year. This is pretty optimistic to assume you can beat the market consistently, but let's just say you can do it. We'll assume you invest the maximum of 6% of your salary each year for a 30 year career and you start out making $50,000 per year and get a 3% raise each year.
As you can see from the chart, the employer-matched plans outperformed the independent investor handily. Now, this is not an exact science and investment results vary from year to year, but the point here is it is very difficult to consistently outperform whatever index funds your employer's plan offers by a wide enough margin to make up for the matching contribution.
A 401(k) match is like free money, or better yet, a bonus from your employer. It's an instant return on your investment of 50%, 100%, or more. All you need to do is take it.
