Why You Should Always Invest in Your Company’s 401(k)

by Shawanda Greene

Brown 401k Egg in NestAs I write this, I’m listening to a friend rail against the evils of Wall Street. Here are a few points mentioned that support her assertion:

    • Wall Street hides sales commissions on mutual funds making it impossible for the average investor to calculate how much they’re charged in fees.
    • The 401(k) was sold to our elected representatives so that Wall Street could get more people invested in their products and increase their profits.
    • With so many people investing in the stock market through 401(k)s, IRAs and other tax advantaged retirement accounts, share prices are overvalued.

First, I acknowledge my friend is probably right. Wall Street, those greedy boogers, will stop at nothing to extract more money for less value and fewer results from the American people. I’m more suspicious of them than I am the U.S. government.

Second, if your company matches contributions to your 401(k), I strongly recommend you invest in it. I don’t care how distrustful you are of Wall Street or government, you’ve got to listen to me on this one.

Now, don’t misunderstand me. If you think you can’t make any money, or worse, lose money, by contributing to investment vehicles in your 401(k) or the like, then don’t invest in them. However, most employer sponsored retirement accounts have a cash or cash equivalent fund, i.e., money market account, you can invest in that’s practically risk free. You do NOT need to invest in the stock market, bond market, or real estate market to earn the employer match.

The only significant amount of money you’ll make by contributing to a cash or cash equivalent fund in your 401(k) is from your employer’s match. Of course, the matching contribution depends on what’s offered by your employer, but for many, it amounts to a return of 50% that’s practically guaranteed. Who cares if the interest rate on the fund you invest in is 0.000001%.

Question: Outside of an employer sponsored retirement account, where else can you put your money that’ll yield an, essentially, risk-free return of 50%?

Answer: Nowhere.

Before I go, I’d be remiss if I didn’t mention this.

For a second, forget about Wall Street. Forget about the government. Do you trust your employer? It is possible your employer will run off with your 401(k) contributions and the match they promised. Check the balance with your 401(k) custodian to make sure the money you’re due makes it to where it’s supposed to go.

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{ 9 comments… read them below or add one }

Brave New Life August 22, 2011 at 4:05 PM

Fortunately, most 401K's are set up in a 3rd party account (mine is with Fidelity) so my employer could not take my money and run.

They could stop matching, but at any large company I doubt they would have the stupidity to try to pull that off.


Shawanda August 23, 2011 at 7:06 AM

"Fortunately, most 401K's are set up in a 3rd party account (mine is with Fidelity) so my employer could not take my money and run."

There's still the opportunity for your employer to steal your 401(k) contributions. After deductions are made from your paycheck, your employer must send the payment to the 3rd party that manages the 401(k). My employer only takes a couple days to make the transfer. Some unscrupulous companies wait as long as legally possible, or longer, to fund employees' 401(k)s. Just in case, I make it a habit of checking my 401(k) account to make sure my money is deposited on a timely basis.


1step August 22, 2011 at 5:13 PM

I totally forgot you could do the equivalent of a money market account. That would be a great way to get free money that you're entitled to as an employee if you're feeling really risk averse.


Shawanda August 23, 2011 at 7:12 AM

In late 2008, one of the older participants in a money management class I taught told me she took all of her money in her 401(k) out of the stock market and ceased making contributions. I reminded her she could still get the match in a money market account within her 401(k) without the volatility. Hopefully, she listened to me.


@DebtChronicles August 22, 2011 at 11:17 PM

My employer has a great matching program, and I have lots of options as to how I can diversify my contributions. I'm not taking advantage as much now as I could be, but I need to pay my debt off first, then I can concentrate more funds to my 401K.


Shawanda August 23, 2011 at 7:14 AM

I suspended contributions to my 401(k) when I was getting out of debt. It was an easy decision since my employer didn't match employee contributions. If they did, it's likely I would've had a much more difficult time passing up the free money.


Funancials August 25, 2011 at 11:48 PM

I'm sensing paranoia…investing in the stock/bond market is the only opportunity for growth.


My University Money August 27, 2011 at 9:04 AM

You don't have to trust money managers with your money. Simply choose the cheapest Index fund or S & P ETF and just invest the same amount every month. The stock market has returned over 10% annually, so even if your being pessimistic, 8% going forward is pretty conservative.


@JoeTaxpayerBlog January 16, 2012 at 3:08 PM

Saw your tweet of this article. Your readers need to focus on the most important line here "You do NOT need to invest in the stock market, bond market, or real estate market to earn the employer match."


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