Should I Invest Beyond The Company Match in My 401(k)?

Added June 2, 2009 by Ilyce R. Glink

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Summary: If you work for a company that offers a match for a 401(k) should you take it? And, how much should you contribute to the 401(k)? If the company offers to match 50 percent of the contribution up to the first 6 percent of your salary you contribute to the 401(k), should you contribute over and above that amount? So many companies today are eliminating 401(k) match programs simply because they can no longer afford them. A listener to Ilyce's radio talk show wants to know if he should contribute 10 percent to a part-time employer's 401(k) program. The company will match 50 percent of his 401(k) contribute up to 6 percent of his salary. He wants to know if he should contribute 10 percent of his salary to the 401(k) even though the employer will not match the last 4 percent.

Q: Ilyce, I am an occasional listener to your radio show, and enjoy it a lot.

My situation is this: I have a part-time programming job that offers 401(k). I have decided to put 10 percent of that income toward the 401(k) because the company offers a 50 percent match up to 6 percent of my income with immediate vesting. I know the extra 4 percent doesn't add any company dollars, but 10 percent sounded better than 6 percent. I am 39 years old, with very little savings, and need to get started. I thought this would help.

My question is this: Is this a bad idea? What sort of investment should I elect? Nearly all the offerings show double-digit losses in recent years. I want to take advantage of the free company money, but I don't want to throw it away along with my own money.

A: Given what's been going on with the economy since 2008, I'm thrilled that you're thinking about investing now rather than hoarding cash or stuffing it in a mattress.

Most important: Don't think of this investment you're making as "throwing money away." Instead, imagine that you're buying a larger share of the stock market while it is on sale. The stock market won't be at these levels forever. At some point in time, it will begin to go up -- as will your 401(k). In fact, the stock market is already up 30 percent plus from its low on March 9, 2009. It may not stay there, and in fact, I expect the stock market to fall back at some point in time. But then, as the economy strengthens, it will go forward again.

The point is, if you're getting a free match to your 401(k) with immediate vesting, you should take it. And, you should be sure you're properly diversified, which means your asset allocation is distributed across several sectors: Large US companies (S&P 500-type fund), Small Cap (like the Russell 2000), a small slice of International stocks (no more than 15 percent), a bond fund and cash. If you feel good about your employer's prospects, and company stock is an option, you can put up to 5 percent of your funds there as well.

I know it's only a part-time job, and perhaps we're talking at most about $2,000 to $3,000 per year. But getting a company match for your 401(k) is free money I think you should definitely take advantage of this opportunity to boost your retirement savings.

I hope this helps. Thanks for listening.

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