Should I Participate in a 401(k) Without a Match?

Planning your retirement can be an intricate process. It is also a long-drawn procedure that can take multiple years to finish. Over the years, you may be required to make several changes to your retirement plan. Inflation, tax rules, your changing lifestyle needs, new additions to your family, health issues, and other similar factors need to be accommodated into your plan. Having an inadequate retirement corpus can lead to hardships later. You may even risk outliving your savings or may have to work when you are older to make up for the shortfall.

Any help you can get to build your retirement fund can be crucial. A 401k retirement plan offers an employer match that helps you build a bigger corpus for your golden years. This can be like free money since your employer will contribute to the plan over and above your contributions. This is also one of the primary reasons for the plan’s popularity and widespread usage for decades. However, the employer is not obligated to match your contribution. In many cases, companies do not offer a match. This can considerably reduce your overall returns at maturity. Consult with a professional financial advisor who can advise you on the effects of your employer not contributing to your 401k and the impact it will have on your retirement savings.

A 401k with no match can be a conundrum, and you may wonder if it is still worth contributing to your plan. Find out how this can affect you

What is a 401k employer match?

A 401k is a tax-advantaged tool that helps you build retirement savings. It is offered by companies to their employees. It is a significant benefit that can be an excellent financial incentive. There is no hard and fast rule about the money an employer can contribute to a 401k. It is important to note that employer contributions are not mandatory by law. However, most companies do so to improve productivity and retention. In some cases, the company may offer a match to only high-level employees. So, if you join a company at an entry or mid-level, you may not receive it. However, since it is a part of your employee benefits, you can negotiate the terms before taking up a job. In fact, apart from the salary and role, the 401k match is one of the most important things to pay attention to when you are searching for a job.

You may find that a majority of companies offer to match up to 50% of the employee contribution. However, this is usually capped at 6% of the employee’s salary. Some companies also offer to match 100% of the employee contribution but with a 3% cap on the compensation. For example, if you contribute 5% of your salary, which is $100,000, you can contribute up to $5,000 each year. If your employer contributes half of this, which is 2.5% or $2,500, your total contribution reaches $7,500 per annum.

Some companies also have vesting rules for contributions. So, the employer match may only be vested after a certain number of years. The company may also offer contributions in an increasing manner, such as 20% after the first year, 50% after the third year, and so on. This is usually done to ensure employee retention and improve the company’s attrition rate.

However, these are general statistics, and the details can differ for different industries, companies, skills, and designations. If you are in a field where finding the right candidate can be challenging, and you possess better skills than a majority of your peers, you may be able to negotiate a higher match. Typically, companies may offer a match anywhere between 3% and 6% of your annual salary.

A company that is offering you a match this year may choose to refrain from it the next. Your employer has the authority to terminate the match, contribute less than before, or increase their match if they feel the need to. Companies may do this based on the employee’s performance, business growth, net profit or loss, and other similar factors.

The employer match gets the same tax treatment as yours. So, if your money is growing tax-deferred, your contributions and those of your employer will be taxed in retirement when you withdraw your funds. If you draw money before the age of 59.5, you will pay the penalty and income tax, irrespective of who contributes.

Should I contribute to 401k if there is no match? 

You will lose out on the extra money if you get a 401k with no match. However, it is still advised to continue investing in it. Here’s why:

1. You can create tax-deferred savings:

Tax savings are the first and foremost reason to opt for a 401k without a match. Tax can be a significant setback to your financial goals. Retirement plans like the 401k help you reduce the impact of this setback. A traditional 401k lets you contribute your pre-tax dollars. Your money grows tax-deferred and is taxed in retirement. This helps you in two ways. Firstly, your tax liability is reduced in the present. You can get more money for your present needs and can invest more for your future. Secondly, your retirement income is likely to be lower in retirement than now. So, you save money in the long run, too. If you retire in a state with low taxes, you will save even more. As of 2022, you can contribute $20,500 to a 401k if you are under the age of 50 and $27,000 if you are 50 or older. This means you can still cut down your taxable income by $27,000. This can put you in an entirely different tax slab with a much lower tax cut.

2. You can take a loan to cover your immediate needs:

A 401k without a match still offers you the option to take a loan against your funds. This can be used for certain qualified expenses, such as buying a house, covering education costs, paying medical bills, etc. Unlike other loans, a 401k loan can be a simpler, quicker, and more affordable way to cater to your needs. Even though it is not advised to dip into your retirement savings for uses other than retirement, it can be helpful in an emergency.

You can borrow up to $50,000 or 50% of the assets, whichever is less. This can be done in a tax-free manner. However, you are required to repay the loan. This can be done by contributing back to your 401k plan. However, these contributions will be considered your repayments and not contributions toward your retirement fund. You can continue building your savings after the entire loan has been repaid. In most cases, you can settle the loan with payroll deductions.

Moreover, there are no additional costs like repayment or processing fee. All you pay is a small administration fee. And the money you repay is invested into your choice of investments. So, your investment journey does not really stop.

Having said this, not all companies provide the option to avail of a loan. So, you must check this with your employer and then plan your needs. Additionally, even if your company offers a 401k loan, but you need to quit your job, you will have to repay the entire amount within 30 days. If you fail to do so, the loan will be considered a withdrawal. So, you will have to pay income tax on the unpaid loan amount and a 10% penalty for early withdrawal if you are under the age of 59.5.

3. You do not have to exit your 401k plan when you quit your job:

Even though your 401k is a company-sponsored plan, you can still take your 401k to a new company when you quit or switch jobs. The funds in a 401k belong to you and not your company. So, you have the right to take them with you. You can consider withdrawing your money. However, this can lead to a 10% penalty and income tax if you are under 59.5 years of age. So, it may be better to avoid this. The other option can be to roll it over to your new employer. However, this can only be done if your new job offers a 401k plan. Moreover, the new company may have vesting periods or waiting periods before you can contribute. Make sure you understand these rules. You can also roll over your money to an Individual Retirement Account (IRA). However, IRA contribution limits are lower than 401k contribution limits. As of 2022, you can contribute up to $6,000 if you are under the age of 50 and $7,000 if you are 50 or older. This is a lot lower than the limit of $20,500 and $27,000 for a 401k. Nevertheless, IRAs are also tax-advantaged accounts with plenty of benefits. So, irrespective of the option you choose, your 401k funds will be secure and with you. 

4. You can invest in multiple investment instruments:

A 401k without a match can offer diverse investment options, such as money market funds, target-date funds, mutual funds – equity and bonds, company stocks, Guaranteed Investment Contracts (GICs), etc. There is a lot of room for choice, and you can create a diversified portfolio within your 401k. Each option can appeal to different risk appetites and help you earn money according to your changing objectives. For instance, your risk appetite is likely at its maximum at the beginning of your career. So, you can invest more money in company stocks, equity mutual funds, etc. However, if you are nearing retirement, you may shift to bond mutual funds, GICs, etc. This can help you lower the risk right before retirement.

You can invest in a combination of different assets based on the options available. Every plan administrator may offer distinct options. So, if you switch companies, you must look at all possibilities and accordingly adjust your portfolio, if needed. Moreover, every company may have rules for the frequency or type of switches. So, make sure you understand them well. In most cases, you can make these changes online without any hassles.

5. You get to build disciplined savings:

You can still create a significant retirement corpus even if you get a 401k with no match. A 401k is a long-term approach to retirement planning. If you start saving in the account in your 20s and retire in your 60s, you have 40-odd years to build your savings. You may start small and slowly build your savings. However, the consistency and compounding effect can provide you with substantial growth at maturity. Combined with the tax benefits, you can build wealth effectively and secure your future. Financial advisors often recommend starting at a young age. For every five years that you delay contributing to your 401k, you would have to contribute double the amount each month to make up. So, whether or not your employer offers a match, do not delay starting on your own.

Is 401k worth it without matching?

Yes and no. A 401k is helpful in many ways, like the ones mentioned above. However, it may not be worth it in the following cases:

  • If you switch jobs often: In this case, you may find it hard to keep track of all your 401ks. Moreover, since different companies will have different 401k rules and provisions, you may not always get the best growth.
  • If your company charges a high 401k fee: The 401k administration fee can differ for different companies. If the costs are too high, you may benefit more from shifting your money to other options that offer the same level of growth without the high costs.
  • If your plan administrator is not proficient: A poor plan administrator will reflect on your investments’ performance. If you find little or poor growth, you may be better off without a 401k with no employer match.
  • If your 401k offers limited investment options: The investment options within your 401k can vary. If your plan does not provide suitable options, you can consider shifting to an IRA.

To summarize

A 401k with no match may be hard to swallow, but it can still be beneficial in many ways. It will help if you try to demand a 401k employer match before you take up a job. However, it may not always be possible to get one. Several factors can play a role here, many of which could be out of control. Nevertheless, you can continue using the plan to create wealth and build your retirement savings.

Moreover, if you need help managing your investments within a 401k or to unlock the plan’s full potential, you can reach out to a financial advisor in your area. Use Paladin Registry’s free advisor match tool and get matched with 1-3 qualified advisors who may be able to help you with your unique financial goals and requirements.


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