Job Hunting and 401(k)'s: No Match? Forget It

Why an employer match of 3 percent should be a minimum requirement.

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When you're surveying the benefits of a potential job, an employer 401(k) contribution match should be pretty much non-negotiable. The match should be a minimum requirement, but it's not necessarily a sign of a top-notch retirement plan, says ABC News columnist David McPherson. Here are two things he says to look out for when evaluating an employer contribution (the bold sections are mine):

First, any employer of a decent size should offer a contribution that amounts to at least 3 percent of your salary. This may be a stretch for some small employers or startups, but it should be the starting point for most companies...The most common formula is one in which the employer kicks in 50 cents for every dollar you contribute, up to 6 percent of your pay. Whatever the formula, your bottom line should be that the employer's contribution amounts to at least 3 percent of what you make. Anything less and I'd keep looking.

In addition to the size of the employer contribution, a second factor to consider when it comes to evaluating a company 401(k) is the form of contribution: Cash or company stock? I prefer cash. I'd be real careful before accepting a job that offers company shares instead of cash as a match. A stock match is a sign the company managers are looking to offer a 401(k) on the cheap and are not concerned about the retirement well-being of their employees... There may be scenarios under which it makes sense to accept a job that comes with company stock contributions, such as if the matching amount is particularly generous. But you have to be real diligent to make sure you sell shares on a regular basis to avoid overconcentration in this single investment. If a would-be employer restricts when company shares may be sold in a 401(k) plan, then I'd keep job hunting.

McPherson also illustrates the importance of a match through this example:

Consider the potential difference in retirement savings for two 30-year-olds, each making $50,000 annually in similar jobs at different employers within the same industry. One person receives a 3 percent match; the other receives no match. Assume each contributes the same 6 percent of his salary to the company 401(k), receives 2 percent annual pay raises, and earns a 7.5 percent average annual rate of return. In 35 years, the person receiving the 3 percent match would accumulate $864,735 by age 65. The person receiving no match would accumulate $576,490. Are job satisfaction and other factors going to be enough to make up for the $288,245 difference?

Here are a few other tips on how to tell if you're getting into a lousy 401(k) plan.