Friday, November 14, 2014

401(k) matching Funds ... If Free Money is Both Scarce and Nice,Then Why Do So Many People Refuse to Take It?

Most people like free things. So do I.

So what if someone offered you free money? Would you take it? So would I.

My guess is that virtually everyone asked would answer that question the same way you and I did. But if that's the case, then why don't participants in 401(k) plans take full advantage of the matching contributions their employers offer? For whatever bad reason you can think of, and unfortunately, many employees in effect turn down the free money offered to them. Go figure.

If a company matches employee contributions dollar for dollar, we're getting an immediate return of 100% on our investment, aka contribution. We're also buying with MOM (my own money) a blue chip stock at a 50% discount (if a 50% match it's a 33% discount). And if that stock pays a 3% dividend (not taxable while the money stays in the 401(k) account), that means we're getting 6% (if a 50% match that's a 4.5% dividend yield) on each of our dollars contributed.

And over time the price of that blue chip stock that he or she didn't buy, along with its dividend, will increase dramatically, making what would have been a great deal a huge missed opportunity for the employee. And when an employee says no thanks to the company on its free money matching contributions offer, that signals that a long term savings and investing tragedy may lie ahead for that employee.

Don't make the mistake that cost Boeing employees $98 million tells the story of free 401(k) money left on the table by Boeing employees:

"Who doesn’t like free money?

Investors saving for retirement face many obstacles, including high fees, poor investment options, vanishing pensions and even outright fraud.

However when workers pass up an offer of essentially free money with no strings attached, it's hard to identify a scapegoat other than those workers. . . . more than 56,000 Boeing employees fall into that category. . . . (they) left $98 million on the table in 2013 by not taking advantage of matching funds in the company's 401(k) plan.

According to this report, approximately 8,400 Boeing employees declined to participate at all in the program last year, and another 48,000 "didn't contribute enough to receive the maximum company match." . . . It's startling to realize that about a third of all Boeing employees are voluntarily taking less pay than the company wants them to have. To receive the full company match, employees would only need to contribute 8% of their base pay.

Boeing matches those contributions at the rate of an extra 75 cents on the dollar. In other words, set aside $1 and get an instant one-time-only return of 75%.

I don't know why employees are passing up this opportunity. Undoubtedly many of them are relatively young and struggling to make ends meet. . . . However, I think many of these employees have failed to do some simple math. Here's an example:

An employee with a base pay of $60,000 is eligible to earn a 75% match on up to $400 a month. The monthly match, $300, amounts to a raise in pay of $3,600 a year. That's the equivalent of a 6% raise — something I doubt employees would turn down if it were offered to them in those terms.

Here's another example: The $98 million left on the table is only for a single year. Multiply that by a decade and you have nearly $1 billion these employees never got.

Invest that $1 billion for a mere 20 additional years and it could easily grow to be worth five times that much. These of course are extremely conservative numbers because most people work longer than 10 years and invest for more than 20.

But here's the real math: $5 billion is worth 50 times as much as the $98 million that Boeing gave its shareholders last year because some of its employees didn't want the money enough. And that doesn't take into consideration the future value of the employees' own savings — an even higher number.

I used Boeing as an example but they’re hardly alone.

A survey conducted this year by Harris Poll for Wells Fargo found that middle-class U.S. residents aged 25 to 75 have set aside a median of only $20,000 for their retirement. One-third of them reported they are not contributing at all to a 401(k), an IRA or any other retirement plan — that's far worse than the Boeing statistics. Of those who are saving, the median amount reported was $125 a month.

About half of those who were in their 50s told the pollsters they expect to work until age 80 because they will have inadequate savings to retire.

Overall, more than seven out of 10 who were polled said they now believe they should have started saving earlier. . . . We can't change our past, but most of us can change our future if we change what we're doing now."

Summing Up

To repeat, who doesn't like free money?

And who doesn't need to save and invest for the future?

And how else can we get an immediate 100%, 75% or 50% return on any investment?

And if the free money is a supplement to the money we should be saving anyway, what's not to like?

So here's my take. What's wrong with these people?

I don't get it. Not at all.

Thanks. Bob.

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