Author Topic: A rose by any other name: the 401k employer match is not free money  (Read 9215 times)

mobyrocket

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I'm beginning to think we've all been swindled a little bit in allowing the employer match to be referred to as free money especially after reading this article http://money.cnn.com/2014/08/12/retirement/401k-match/index.html?iid=SF_PF_River.

I've been thinking about this for sometime and I really want to put this out to the mmm community.  So here is my beef.  The employer match on our retirement contributions is not free money.  It is part of our total compensation.   So when we refer to our savings and strategies, I see a lot of folks (myself included) say, save enough to get the employer match, cuz if you don't you are leaving free money on the table.

The disservice we do to ourselves is considering this some kind of bonus or employer benevolence.  It's not.  It is a component of our total compensation.  If we continually think of it as employer benevolence or money we can take or leave (as in free money) (even though no self respecting mustachian would leave free money on the table), we may be more likely to just chalk up reductions in the employer match as a change in benefit that we just have to except because the economy or downward pressure on profit, etc.  We may be less inclined to raise a stink if, as in the article listed above, our employee instituted swapping more match for less salary as a reasonable proposition.  The only time I would be okay if my employer decreased the take home salary I get by increasing the tax deferred compensation I get is if it was a net change or I ended up with more compensation. 

But what do you all think?  Do you consider the employer match your compensation or do you consider it free money?  If you don't consider it free money, do you include it in your overall savings rate?  Do you think the thinking in the article posted above is a sign of things to come that employers will couch reductions in match as a change in benefits but not actually call it a salary reduction? 
« Last Edit: August 14, 2014, 06:25:50 PM by mobyrocket »

Angie55

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Re: A rose by any other name: the 401k employer match is not free money
« Reply #1 on: August 14, 2014, 12:31:19 PM »
I partially disagree. Most companies nowadays have vesting requirements from 1-5 years. If you don't meet the vesting time then you don't get the money. Both my husband and I have been screwed out of significant portions of our match money by getting laid off in the middle of the required vesting. Based on the length of service of others also laid off, I believe the companies did this on purpose so they did not have to pay out the full amount. At the very least it was one of many factors. One of the major selling points of hiring at one of the companies was a 150% match on your contributions of 10% or less. Well now I see how they can do it because they boot you when you are only 25% vested.

So based on my experience it is free money. I won't count it until its completely vested. If this were considered compensation than the companies retroactively took about 50k of money. To me the "Total Compensation" crap employers put out at the end of the year are just inflated numbers to justify not paying out higher salaries. But I like to look on the negative side of things!

« Last Edit: August 14, 2014, 01:49:07 PM by Angie55 »

deedeezee

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Re: A rose by any other name: the 401k employer match is not free money
« Reply #2 on: August 14, 2014, 12:38:13 PM »
For those with safe harbor 3% contributions regardless of whether or not one chooses to participate, the employer contribution is compensation.  For those without safe harbor, I consider it "free money."  It is part of my compensation only if I choose to contribute some of my own money and if I satisfy length of service requirements.  Otherwise, I leave it on the table and my employer keeps it.  I consider my 401(k) and its match part of my benefits package and subject to change annually.  The company's health care plans and costs have changed over time,  so I don't see how their "contribution to my retirement" should be any different (but I do consider myself fortunate that they have not changed).


Cheddar Stacker

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Re: A rose by any other name: the 401k employer match is not free money
« Reply #3 on: August 14, 2014, 12:40:39 PM »
It's not free money, but for a different reason than what you state above.

You have to work to get it right, that's not free.

In response to your thoughts, your employer can also change your compensation at any time without reason (unless you're in a union or something) and it's up to you whether or not to accept it. Your only real defense to this would be to find another job.

All that said, make the contribution and get the match, cuz, ya know, it's "free money"

Mrs. PoP

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Re: A rose by any other name: the 401k employer match is not free money
« Reply #4 on: August 14, 2014, 12:42:41 PM »
I absolutely view it as part of my compensation package.  Sure, the vesting is tied to tenure, but it's still compensation even if deferred. 

When I was recently offered a position with a different company, my immediate follow-up to the salary offer was what are benefits and 401K.  When I was told there would be a delay of eligibility in 401K, I explained that I would need a higher base to account for the difference in matching funds and decreased taxes associated with my existing salary in order to have an apples-to-apples comparison. 

Same goes for health care and any other benefits.  This stuff adds up, yo. 



vivophoenix

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Re: A rose by any other name: the 401k employer match is not free money
« Reply #5 on: August 14, 2014, 01:18:36 PM »
i dont think it counts as a compensation, it counts as a perk.
but only because it is dependent on whether you put money in as well.

if you got it no matter what id say compensation. so I would say my safe harbor match that i got every year no matter what is my compensation. i may also look at compensation as something that no matter what i have to be given.  even if you perform poorly for a year they have to give you your salary. they have the option to do away with matching, and they only provide matching if i pony up the money as well.

i agree safe harbor which is get no matter what is compensation, as well as vacation. but 401k is free money, because at the end of the day its not madatory its a perk.

skyrefuge

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Re: A rose by any other name: the 401k employer match is not free money
« Reply #6 on: August 14, 2014, 01:25:43 PM »
The disservice we do to ourselves is considering this some kind of bonus or employer benevolence.

Citation needed. Do people actually think this? I'm not sure that your interpretation of the phrase "free money" is shared amongst the community.

I think people use the phrase "free money" to highlight how much of an idiot you'd have to be to refuse it. Because no one would refuse free money.  It's a way to express shock and horror when you hear that someone neglected to take their "free money". In other words, "a 401(k) match is part of your total compensation, so you must take it, just as surely as you would take free money". It should not be optional for anyone with a brain, and referring to it as "free money" is an attempt to drive that point home.

Frankies Girl

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Re: A rose by any other name: the 401k employer match is not free money
« Reply #7 on: August 14, 2014, 01:29:35 PM »

I think people use the phrase "free money" to highlight how much of an idiot you'd have to be to refuse it. Because no one would refuse free money.  It's a way to express shock and horror when you hear that someone neglected to take their "free money". In other words, "a 401(k) match is part of your total compensation, so you must take it, just as surely as you would take free money". It should not be optional for anyone with a brain, and referring to it as "free money" is an attempt to drive that point home.

Yup. I consider it part of the benefits package, but it would be completely stupid to me if someone wasn't contributing to get the match at least since it's offered.

vivophoenix

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Re: A rose by any other name: the 401k employer match is not free money
« Reply #8 on: August 14, 2014, 01:35:31 PM »
well let me ask you; if your employer set up a fruit stand and said :hey for every apple you buy we will give you another apple.

 would you consider this compensation, or a benefit of working at this particular company?

solon

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Re: A rose by any other name: the 401k employer match is not free money
« Reply #9 on: August 14, 2014, 01:37:36 PM »
If it's a component of compensation, I don't see why increased match and decreased salary should be a problem. In fact, some might consider it better that way, i.e., less money I can fritter away now.

Cheddar Stacker

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Re: A rose by any other name: the 401k employer match is not free money
« Reply #10 on: August 14, 2014, 01:44:29 PM »
If it's a component of compensation, I don't see why increased match and decreased salary should be a problem. In fact, some might consider it better that way, i.e., less money I can fritter away now.

+1. Less taxes that way. It completely avoids FICA.

Joel

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Re: A rose by any other name: the 401k employer match is not free money
« Reply #11 on: August 14, 2014, 01:51:01 PM »
It's just a matter of linguistics. Yes, it's part of the total compensation package the employer provides you. Yes, you may not get it if you leave the employer being being vested. Yes, it's foolish to not contribute up to the match to get a guaranteed return (subject to vesting).

Nothing in this world is free money. But you are throwing away a potential guanrateed return by not taking the match.

sheepstache

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Re: A rose by any other name: the 401k employer match is not free money
« Reply #12 on: August 14, 2014, 01:54:27 PM »
The employer match on our retirement contributions is not free money.  It is part of our total compensation.   
. . .
The disservice we do to ourselves is considering this some kind of bonus or employer benevolence.  It's not.  It is a component of our total compensation.  If we continually think of it as employer benevolence or money we can take or leave (as in free money) (even though no self respecting mustachian would leave free money on the table), we may be more likely to just chalk up reductions in the employer match as a change in benefit that we just have to except because the economy or downward pressure on profit, etc. 

Yes.  Yes!  I have absolutely seen this attitude even on this board.  If people's compensation changed, folks would be up in arms.  But if benefits terms or amounts change, people say, well, it's something nice the company does for you so you should just be grateful.

dandarc

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Re: A rose by any other name: the 401k employer match is not free money
« Reply #13 on: August 14, 2014, 02:03:14 PM »
The employer match on our retirement contributions is not free money.  It is part of our total compensation.   
. . .
The disservice we do to ourselves is considering this some kind of bonus or employer benevolence.  It's not.  It is a component of our total compensation.  If we continually think of it as employer benevolence or money we can take or leave (as in free money) (even though no self respecting mustachian would leave free money on the table), we may be more likely to just chalk up reductions in the employer match as a change in benefit that we just have to except because the economy or downward pressure on profit, etc. 

Yes.  Yes!  I have absolutely seen this attitude even on this board.  If people's compensation changed, folks would be up in arms.  But if benefits terms or amounts change, people say, well, it's something nice the company does for you so you should just be grateful.
Yeah - this happened here for state employees.  In 2010 they passed a law requiring employees to contribute 3% to the retirement system - everyone was up in arms over the decreased pay, and rightly so.  The deal in 2010, at least for people like my wife was they put in 3% and state puts in 6%.  Just two years later, they cut the employer contribution to 3.21% - nearly the same decrease in compensation.  Nary a whisper from anyone - I didn't find out about it until I was looking at her retirement statements and thought there had been a mistake when the employer contributions dropped suddenly.

I think if everyone worked as an independent contractor, a lot of areas might improve.  Simplifies the negotiation - I give you time, you give me money.  Much clearer.  I'll worry about all the other stuff like taxes and insurance and saving up so I can take a vacation from time to time.

vivophoenix

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Re: A rose by any other name: the 401k employer match is not free money
« Reply #14 on: August 14, 2014, 02:06:52 PM »
people dont complain because they are so short sighted.

sometime people just dont have the ability to look beyond today.

it reminds me once of a guy who refused to pay for medicals benefits not jsut because they cost so much, but he didnt like the look of the smaller check each week.

because it wasn't tangible benefit he didnt value it as much as cash.

i think this is the case with 401ks as well

mobyrocket

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Re: A rose by any other name: the 401k employer match is not free money
« Reply #15 on: August 14, 2014, 02:11:38 PM »
The disservice we do to ourselves is considering this some kind of bonus or employer benevolence.

Citation needed. Do people actually think this? I'm not sure that your interpretation of the phrase "free money" is shared amongst the community.

I think people use the phrase "free money" to highlight how much of an idiot you'd have to be to refuse it. Because no one would refuse free money.  It's a way to express shock and horror when you hear that someone neglected to take their "free money". In other words, "a 401(k) match is part of your total compensation, so you must take it, just as surely as you would take free money". It should not be optional for anyone with a brain, and referring to it as "free money" is an attempt to drive that point home.

Skyerefuge - The "disservice" comment was my interpretation of the many references to the employer match being free money when I see it discussed across pf websites and media like CNN etc.  I think I was projecting how I've been thinking about the employer match which rightly or wrongly I feel has been confirmed with the phrasing of free money and that is considered a benefit as distinguished from salary.

It's not free money, but for a different reason than what you state above.

You have to work to get it right, that's not free.


Yup, another good reason to think of it not as free money but as salary.  In exchange for my labor, I get my salary as both direct pay and as a tax deferred match on my contributions to a retirement plan.

I do think it is an interesting overall discussion to have around the employer payment of salary and benefits in exchange for my labor.  We do often talk about the perks of our job as different from our salary.  And I wonder why.  I guess I'm going through a thought experiment that they are all components of my salary.  So if I had to pay for a perk myself, i.e. health care, retirement planning, long term disability, etc, I would have to use my salary or other earnings to cover it.  Instead the employer offers it to me and so I have a perk instead of more salary.  You are right that the only real recourse I have is to negotiate with my current employer or leave to take another job that meets my compensation requirements.

I think, and again this is just my opinion, that when employers cut benefits, ex, shift health care premium payment from the employer to the employee as a cost savings measure, we sort of accept it because health care costs are rising and that's just life and is considered smart business for the employer, etc, versus the company that cuts salaries, which is more of an indication of a poor performing company.  When really they're the same thing, the company is trying to reduce overall costs related to their human capital.  So if we continue to view the match as a benefit as distinguished from salary it might make it more palatable for a company to reduce the match without too much backlash vs. say a straight cut in salary.  Now I could be wrong completely, as evidenced by the back lash that AOL got when they tried to even shift not the match but when they actually pay the match out - lump sum at end of service year instead of incrementally overall pay period in a service year.

« Last Edit: August 14, 2014, 06:27:22 PM by mobyrocket »

shuffler

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Re: A rose by any other name: the 401k employer match is not free money
« Reply #16 on: August 14, 2014, 02:57:57 PM »
Agree that it's a linguistics thing.

The "free money" statement is typically made to someone who is already employed and already has a compensation package, not to someone who is negotiating a total compensation package for a new job.

If you consider a person for whom the employment and compensation package are already fixed in place, then that person better fits the "free money" expression.  If they are currently not contributing to their 401k, and then they begin to contribute and receive the 401k match, then the match is "free money".  That person didn't spend any money (they have just as much as they started with, though some of it is now earmarked for retirement), and they were given more (aka free) money via the match.

shotgunwilly

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Re: A rose by any other name: the 401k employer match is not free money
« Reply #17 on: August 14, 2014, 03:00:47 PM »
What the hell does it matter whether you call it "free money" or if you call it a part of your compensation? 

Franklin

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Re: A rose by any other name: the 401k employer match is not free money
« Reply #18 on: August 14, 2014, 03:06:54 PM »
Agree that it's a linguistics thing.

The "free money" statement is typically made to someone who is already employed and already has a compensation package, not to someone who is negotiating a total compensation package for a new job.

If you consider a person for whom the employment and compensation package are already fixed in place, then that person better fits the "free money" expression.  If they are currently not contributing to their 401k, and then they begin to contribute and receive the 401k match, then the match is "free money".  That person didn't spend any money (they have just as much as they started with, though some of it is now earmarked for retirement), and they were given more (aka free) money via the match.

+1.  We may be splitting hairs on this one.

skyrefuge

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Re: A rose by any other name: the 401k employer match is not free money
« Reply #19 on: August 14, 2014, 04:12:27 PM »
I think I was projecting how I've been thinking about the employer match which rightly or wrongly I feel has been confirmed with the phrasing of free money and that is considered a benefit as distinguished from salary.

Yup, your post makes more sense now. Your brain just made a word-association without fully grasping the underlying meaning of those words. You saw "free money" as something inferior to "salary", when really, it is meant to be something superior. Here is the ranking of how you should like to accumulate money:

1) Free money: money for which you don't have to perform any labor to obtain
2) Salary money: money you obtain in exchange for your labor.
3) Expensive money: money for which you pay someone else money to obtain (borrow).

If you want to accumulate lots of money, it's clear that the best way is get as much from category #1 as you can. #2 is a decent second option, but why work for it if you don't have to?

"I can understand why you'd want to leave 'salary money' on the table (don't want to work longer hours/have more responsibility), but why leave 'free money' on the table?!"

We do often talk about the perks of our job as different from our salary.  And I wonder why.

I guess maybe naive non-Mustachians might talk of it that way. But I think most enlightened Mustachians are informed enough to see through the bullshit smokescreen and understand that "perks" and "benefits" and "salary" are simply different names for things that are a part of your total compensation, and they should all be included when comparing against alternatives (though yeah, I'm kind of surprised how many people in this thread were still keeping them separate).

As you note in your AOL example, people *do* notice when their "perks" or "benefits" are cut, just as they notice when their "salary" is cut. But some of the reason they "accept" it is because even after the reduction, they still cannot find a better total compensation package elsewhere.  My 401(k) match was dropped at my old company, and while it was clear and obvious to me that it was a cut in my compensation, it wasn't enough to make me leave the job. And my current company hasn't offered a match since I joined. But the total compensation was sufficient enough that I "accepted" it.
« Last Edit: August 14, 2014, 04:15:15 PM by skyrefuge »

FastStache

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Re: A rose by any other name: the 401k employer match is not free money
« Reply #20 on: August 14, 2014, 04:36:23 PM »
I'm beginning to think we've all been swindled a little bit in allowing the employer match to be referred to as free money especially after reading this article http://money.cnn.com/2014/08/12/retirement/401k-match/index.html?iid=SF_PF_River.

I've been thinking about this for sometime and I really want to put this out to the mmm community.  So here is my beef.  The employer match on our retirement contributions is not free money.  It is part of our total compensation.   So when we refer to our savings and strategies, I see a lot of folks (myself included) say, save enough to get the employer match, cuz is you don't you are leaving free money on the table.

The disservice we do to ourselves is considering this some kind of bonus or employer benevolence.  It's not.  It is a component of our total compensation.  If we continually think of it as employer benevolence or money we can take or leave (as in free money) (even though no self respecting mustachian would leave free money on the table), we may be more likely to just chalk up reductions in the employer match as a change in benefit that we just have to except because the economy or downward pressure on profit, etc.  We may be less inclined to raise a stink if, as in the article listed above, our employee instituted swapping more match for less salary as a reasonable proposition.  The only time I would be okay if my employer decreased the take home salary I get by increasing the tax deferred compensation I get is if it was a net change or I ended up with more compensation. 

But what do you all think?  Do you consider the employer match your compensation or do you consider it free money?  If you don't consider it free money, do you include it in your overall savings rate?  Do you think the thinking in the article posted above is a sign of things to come that employers will couch reductions in match as a change in benefits but not actually call it a salary reduction?

I don't consider it free money at all.  I think if I took a job w/o a match, I would compare how much I make with the match versus the new job.

I do include it in my savings rate as it money I can use in the future, but it does get complicated if you were to factor in future taxes.

TomTX

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Re: A rose by any other name: the 401k employer match is not free money
« Reply #21 on: August 16, 2014, 12:07:12 PM »
Guys, the "free money" phrase is NOT aimed at you.

Using the phrase "FREE MONEY" is used to get normal people to put enough money in to at least get the match. Because otherwise it's NOT part of their compensation. No contributing = no match (typically).

milesdividendmd

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Re: A rose by any other name: the 401k employer match is not free money
« Reply #22 on: August 16, 2014, 02:01:30 PM »
It seems that there are 2 questions tied up in this topic.

1.  Do employers match 401K funds out of the goodness of their hearts?
2.  Are matching funds actually "free."

For question 1, I the answer is certainly "no."  Employers employ people for 1 chief reason: so that they can make more money themselves.  All forms of compensation, including matching funds, are simply means to this end.

For question 2 I think the answer is almost "yes."  Matching funds are awarded for a trivial amount of work;  namely the act of enrolling, not spending, and placing adequate funds in a retirement account.  If this is not "free" it is at least highly compensated on a money/hour of effort basis.