Sunday, August 27, 2006

401k Matching

Lately, for a variety of reasons, I've been spending a bit of time analyzing some of our finances. Yesterday while I was transferring some money between accounts, I happened to end up looking at my 401k account information. That jogged my memory on something that I had intended to write about several weeks ago.

I had been reading an article that discussed the new 'Pension Protection Act' bill that was signed several weeks ago. Now, whether the bill actually protects defined-benefit pensions as the name implies or hastens their inevitable demise is unimportant for this post. The part that I found interesting was new rules related to forcing employees to hold company stock.

Company stock

The new law places limits on just how long an employer may insist you keep your money in company stock.

If it makes its matching contribution in stock, you must be allowed to sell it no later than after three years of service.

If you've acquired company stock before the law goes into effect and you've been at a company for three years, you will be allowed to sell a third of it in the first year the law takes effect, another third in the second and the final third in the year after that. But any new stock you receive after the law goes into effect you may sell at any time.

My employer happens to take the cheap way out of their matching contributions, making their 2% match only in company stock (actually a fund that approximates the stock, but it is effectively the same). They do not allow you to choose to invest the match anywhere else, nor allow you to sell any of that stock until you are 50 or older.

It's only 2%, they argue. What difference does that small amount make? The thing is, it is 2% of your salary and over the years if the company stock performs poorly it can make a big difference. Take my company for example.

Those matching funds are in an investment that has a total return over the past 6+ years of -45.9%. In other words, if I was to sell all that stock today, I would only have half the amount that they 'matched', effectively reducing their match from 2% down to a measly 1%.

Even worse is the lost appreciation. If, instead of investing in my companies common stock fund, that match had been invested the same way as the rest of my funds the total value of my 401k would increase by over 14%. That's a significant amount.

Now, perhaps the numbers are skewed a bit because the company has performed so poorly over the past few years, but the math stands.

As it happens, my company is freezing their pension plan at the end of this year and any further matching can be invested however we choose, regardless of age. But the funds already in company stock have to remain there, and regardless I'll probably never regain the lost company 'match', let alone any of the lost appreciation.

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