Why Your Awesome 401(k) Match Is Worth Less Than Cash

Many Americans apparently value their 401(k) matching funds more than cash money. A new survey by Fidelity found that 87 percent of 401(k) participants would take a job only if it offered a match, and the hypothetical offer of a bigger salary didn’t entice them to go matchless. Another 43 percent in the survey went so far as to accept a smaller base salary in exchange for a bigger match. That’s surprising because, when you account for risk, a match is worth less than its cash value.

There’s not much difference between an employer matching your 401(k) contribution or paying a bigger salary. You can just as easily contribute the extra salary to a 401(k) yourself. There are tax benefits to saving through an employer match instead, but only high-earners reap those benefits. For everyone else, a bigger salary is a less-risky choice. Salary compensation is far more liquid, since you can spend it today instead of waiting until you’re 59 and a half. That flexibility is valuable. If for any reason you must cut back on savings, your match falls, too. Taking a bigger salary means more certain pay.

The future of the match itself is also less certain. Employers rarely lower existing salaries, at least not in nominal terms, because it depresses morale and can undermine productivity. A 401(k) match isn’t so sticky. During the height of the recent recession, more than 200 companies eliminated their match entirely. Others decreased it either by lowering the match rate or, as in the case of IBM, by waiting until the end of the year to pay out.

Alicia Munnell and Laura Quinby at the Center for Retirement Research argue that businesses often cut matches when they need more cash during recessions. Matches are normally restored when conditions improve. Munnell and Quinby believe that flexibility spares employees from layoffs and salary cuts.

Fidelity participants probably don’t prefer a match because it facilitates future pay cuts. It could be they are trying to avoid paying taxes. In that case, a match is more valuable. You can contribute only $17,500 each year to a 401(k) account if you save on your own. If some of the money comes in through an employer match, you can put in a total of $51,000. That means a bigger tax deferral.

But few people take advantage of this benefit. According to Vanguard, only 12 percent of Americans maxed out their 401(k) account last year. A match also saves on payroll taxes, because employers don’t pay them on matched contributions, while employees pay these taxes on their part. But dodging payroll taxes is not always a good strategy, because it means a smaller Social Security benefit. High-saving, high earners have the most to gain from a match over cash because they face higher tax rates and contribute more. Yet the Fidelity survey suggests almost half of 401(k) participants would prefer a bigger match. Those people can’t all be high-earning savers.

Fidelity participants might prefer the match because it forces them to do something they normally wouldn’t: Save for retirement. Perhaps they know they should save but don’t have the discipline to actually do it. The match might provide the motivation and discipline they need, and that lowers their risk of poverty when they can’t work anymore.

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