Why Your Employer 401(k) Match Matters

Using an employer-sponsored defined contribution plan — 401(k)s, 403(b)s, etc. — is one of the most effective ways to save for retirement. That’s because most employed Americans have access to one and a majority of plans offer a matching contribution in some form.

Yet many 401(k) participants could be losing out on hundreds of dollars, if not thousands, each year by not taking advantage of the matching contributions that their employer provides.

How Does 401(k) Match Work?

There are a few ways your employer could contribute to your 401(k) plan through an employer match. 

Dollar-for-dollar match: Your employer will match your contributions dollar-for-dollar up to a certain percentage of your total compensation.

Stretch match: In a “stretch” contribution set up, your employer matches a percentage of your contributions up to a certain percentage of your total compensation. For example, an employer might do a 100% match up on the first 3% of your contribution and then 50% on the next 2%, for a total contribution of 4% of your salary.

Non-elective match: In this arrangement, your employer will determine a set dollar amount to contribute to each employee, regardless of whether you are contributing to the plan or not.

Check out the table below to see how an employer’s matching contributions could look based on an individual with a $100,000 salary.

These are just some common examples. There are multiple variations of how an employer can elect to match employee contributions.

Determining the way your employer is contributing on your behalf will inform how much you need to contribute in order to receive the full amount.

Under the dollar-for-dollar example, if you contribute 5% of your salary to your 401(k), your employer will contribute the same amount as you. In this instance, you might want to contribute at least 6% to take full advantage of your employer’s match program and get the extra $1,000.

Think about it this way, if you aren’t contributing enough to unlock all of your employer’s match, you are essentially throwing away free money.

Here is a handy online calculator that can help you determine the optimal amount you need to contribute in order to maximize your employer’s match.

reaching the max

Typically, you’ll want to save between 10% and 20% of your gross salary toward retirement.

The maximum that you can defer into your 401(k) personally in 2020 is $19,500 with employer matches going above and beyond that. There is also a $6,500 catch-up contribution if you are over the age of 50.

While reaching the maximum contribution level may not be a realistic goal for the majority of people based on income levels alone, it is achievable for a lot of high-wage earners who are committed to saving for retirement.

If you are one of those savers who max out their 401(k)s, there are two issues that you need to be aware of:

  1. If you hit the max early in the year, and
  2. How your employer matches your contributions – on a plan year or pay period basis

You could be leaving money on the table, depending on how your company’s 401(k) plan is set up.

Per pay or plan year?

If your employer is simply putting in one lump-sum of matching contributions for you – typically at the beginning of the following year – then there’s nothing to worry about. You are getting the full match.

The issue arises when your employer is making the matching contributions on a per pay period basis and you are maxing out the contributions prior to the end of the year.

If you are no longer contributing to the plan because you’ve maxed it out for the year, then you are no longer making contributions per pay period, which means your employer won’t be making matching contributions!

The following illustration should help clarify the point:

Some assumptions:
Annual salary = $100,000 paid monthly
Salary deferral = 24% ($24,000 per year, which exceeds the $19,500 max)
Employer match = 100% up to 6% of salary ($6,000 per year)

In the above example, you would reach the $19,500 max contribution in October. That leaves two months where you’d not be getting an employer match. That’s $1,000 you’re missing out on! In order to fix this, you would need to reduce your contribution rate to 19.5%.

Something to keep in mind is that even if your employer uses a per pay match, the plan may have a “True-Up” feature, and, at the end of the year, you will receive a full match from any missed matches during the year.

You can reach out to your HR representative or review your plan’s Adoption Agreement to find out what type of match your 401(k) plan offers and if there is a True-Up feature included.

PRO TIP: If you are already maxing out your 401(k) plan contributions, you could save even more by opening a health savings account. These accounts are about more than paying healthcare expenses, and when properly utilized, they can supplement your retirement savings now and reduce your expenses in the future. 

The goal of contributing to your 401(k) is to achieve financial independence, but you want to make sure you are doing it in the best way possible.

Be aware of how your plan operates so that you can ensure you’re taking full advantage of your employer’s match.

Should I Lend Money to Friends or Family?

Hard financial times can hit anyone and, with 58% of Americans having less than $1,000 in their emergency reserve, a person may find themselves struggling to pay their bills when such an event occurs.

Do they max out their credit cards? Beg the utility companies to pay late? Borrow money from a friend or family member?

If someone you care about comes to you for financial assistance when they’ve hit hard times, of course, you want to do everything you can to help them.

But before you start writing checks, ask yourself a few questions to help determine if its the right fit for you and your loved one.

Do you have money to lend?

When it comes to your financial ability to make the loan, ask yourself:

  • Do I have enough money set aside for emergencies after making the loan?
  • Am I on track with my other financial goals?
  • Do I have my own debts to worry about?
  • Would I still be in a healthy financial position if I never get repaid?

If you’re not able to lend the money, you can show the friend or family member that you empathize with their situation and perhaps suggest alternatives that may work instead.

Will THis Negatively impact your relationship?

Your relationship with this person is probably important to you and you’ll need to carefully consider how lending them money will affect that.

How would you deal with them spending money on other stuff — like a vacation — before paying you back in full? What if they miss payments or never pay you back? Would you be able to retain the relationship?

If lending money is going to impact the relationship negatively, then you may want to consider helping them in other ways.

Why do they need the money?

Perhaps this person is truly in a unique situation and a small loan is just what they need to get back on their feet.

On the other hand, if this person needs help on a regular basis, a cash infusion addresses the symptom rather than the underlying issue. It could be careless spending or another issue that needs to be fixed, not enabled.

Instead of offering money, offer to help them fix the problem. For example, you could help them set up a budget or offer to pay for a class like Dave Ramsey’s Financial Peace University.

lending smart

If you decide you are comfortable loaning your friend or family member money, make sure you have a conversation up front about the terms of the loan. Talk with them about how the repayment will work and make sure it works for both parties.

Once the details have been discussed, create a written loan agreement to detail the amount of the loan and how much interest will be charged and paid (annually, quarterly, monthly). Include how and when the loan will be repaid. Set expectations and steps for how late payments are handled, and any fees for late-payments and how those fees will be calculated and charged. Also, state what happens if the loan is not repaid.

Creating a collaborative agreement and setting clear expectations together will help foster a pleasant lending experience for both parties.

Disaster Relief Funds Run Dry

Yesterday, less than 2 weeks after launching recovery programs for small businesses, the Small Business Administration (SBA) has announced that the $349 Billion dollar relief fund has run dry.

The numbers are pretty staggering. The SBA says that is has processed more than 14 years worth of loans in 14 days and approximately 1.5 million businesses have been approved for $350,000 in forgivable PPP loans. View some stats on the PPP here.

So what if you’ve already applied and haven’t received funds yet? It doesn’t necessarily mean that you won’t receive funding at all.

If you have an E-Tran number than your lender has already sent your application into the Capital Access Financial System (CAFS) and it’s possible that your loan has been account for and being processed, you just haven’t received the funds yet.

If your lender hasn’t submitted your loan application to the SBA through the system, and you don’t have an E-Tran number, then it is unlikely that your application will be processed at this time. Here is what the SBA website states:

Lapse in Appropriations Notice: SBA is unable to accept new applications at this time for the Paycheck Protection Program or the Economic Injury Disaster Loan (EIDL)-COVID-19 related assistance program (including EIDL Advances) based on available appropriations funding. EIDL applicants who have already submitted their applications will continue to be processed on a first-come, first-served basis.

Don’t lose hope yet though. I suspect that there will get more funding in the next few weeks as the government has already mentioned that another $250 billion could be added to the CARES Act to help fund these programs.

If your bank is still taking applications, go ahead and apply in case more funds become available. You don’t want to lose your spot in the queue.

COVID-19 and the CARES Act

Last Friday Congress passed the Coronavirus Aid, Relief, and Economic Security (CARES) Act, a $2 trillion emergency fiscal stimulus package, which includes a wide range of provisions aimed at helping ease the economic damage that this global pandemic is causing on families and small businesses. 

It’ll be some time before I’m done reviewing all of the content within the bill but there are a few key provisions that I wanted to let you know about as they will likely have an immediate effect on you. These include:

Direct payments to individuals

This is probably the most talked-about provision in this bill which provides every adult a recovery rebate of $1,200 and $500 per child (subject to income limitations) for 2020. They are basing the rebate credit on your most current Federal tax return, either 2018 or 2019, so if you had less income in 2019 and haven’t filed your taxes yet, you may want to do that as quickly as possible.

Here is a link to a calculator to estimate how much your check might be https://www.omnicalculator.com/finance/stimulus-payment.

The funds might be best utilized by boosting your cash reserves or paying off debts if you don’t have an immediate need for the cash.

2020 RMDs are suspended

The CARES Act waives any required minimum distributions (RMD) that were to be taken in 2020. This applies to Traditional IRAs, SEP IRAs, SIMPLE IRAs, 401(k)s, 403(b), and Governmental 457(b) plans.

If you’ve already taken your RMD for 2020 within the last 60 days, it is possible to roll it back into the account and defer paying taxes. You’ll just need to transfer an amount equal to your RMD back into your retirement account before the end of the 60-day window.

Student loan payments are deferred

There are no payments due on Federal loans until 9/30/2020 and interest will not accrue during this time.

Payments will continue by default so you must contact your loan provider, or go online, to request the payments be stopped.

If you are on track for a loan forgiveness program, like Public Service Loan Forgiveness, the months of April through September will continue to count toward meeting the requirements even if you aren’t making payments. You are essentially getting 6 free months toward qualifying for whatever loan forgiveness program you are in so be sure to take advantage of it. 

Some ideas for the freed up cash flow is to pay off other debts that can not be temporarily paused or to maximize contributions to your retirement accounts.

Help for small businesses

The Coronavirus pandemic has severely impacted small businesses with issues such as loss of revenue, incapacity to make payroll, employee layoffs, inability to maintain inventory, supply chain interruptions, and other unforeseen circumstances. 

A significant provision included in the CARES Act for small business owners is the Paycheck Protection Program, a (partially) forgivable loan program offered through the Small Business Administration (SBA). Such loans must be applied for by June 30, 2020, and can have a maximum maturity of 10 years. They may be provided via existing approved SBA lenders, as well as lenders who are otherwise certified by the SBA to offer such loans.

Under the Paycheck Protection Program, lenders will generally be able to issue SBA 7(a) small business loans up to the lesser of $10 million, or 2.5 times the average monthly payroll costs over the previous year. In order to qualify for loan forgiveness, the business must maintain the same number of employees during the period Feb 15 – Jun 30 as it did previously. This forgiveness of debt is not considered taxable income for the business. Be aware that it’s not possible to formally apply for this program quite yet because the applications do not exist at the moment. However, if you do plan to apply for this program, you can get a head start by pulling together all of your documents around payroll for the trailing 12- to 18-month periods.

If you are in immediate need of financial assistance, the CARES Act now permits businesses to take an Economic Injury Disaster Loan (EIDL) for up to $2 million. The EIDL is now available in all 50 states and can be used by any small business that has fewer than 500 employees. Self-employed individuals and non-profits are also eligible for this program. For self-employed individuals, you’ll need a copy of your Schedule C or proof of income and expenses as well as potentially 1099-MISCs. 

These loans may be used to pay fixed debts, payroll, accounts payable and other bills that can’t be paid because of the disaster’s impact. The interest rate is 3.75% for small businesses. The interest rate for non-profits is 2.75%. SBA offers loans with long-term repayments in order to keep payments affordable, up to a maximum of 30 years. Terms are determined on a case-by-case basis, based upon each borrower’s ability to repay.

The CARES Act also allows for a $10,000 emergency grant to be issued to anyone who applies for the EIDL. The $10,000 emergency grant is given to business owners within three days of their application, and they’re allowed to keep that money even if your loan is denied. The application process is simple, completely online, and should only take about 15 minutes to complete. Follow this link to get started: https://covid19relief.sba.gov/#/

Expanded unemployment insurance (UI)

If you have lost your job or are experiencing reduced hours due to COVID-19, it is encouraged to file for unemployment insurance benefits as soon as possible as there are extended benefits available.

This includes a $600 per week increase in benefits for up to four (4) months and federal funding of UI benefits provided to those not usually eligible such as those who are self-employed, independent contractors, and those with limited work history.

Visit Indiana’s Department of Workforce Development’s website for more information https://www.in.gov/dwd/3474.htm

I hope you and your family are staying safe during this time. We have been through difficult times before and I am confident we’ll get through it this time too.

Do I Own Too Much Company Stock?

If you work for a large corporation, chances are they offer some way to obtain company stock. A lot of companies use stock (ownership in the company) as a compensation incentive and as a retention tool for key employees.

various Ways to obtain employer stock

There are numerous ways that your employer can make their stock accessible to you. Here are the most common ways that I see:

  1. Stock Options (ISOs and NSOs)
  2. Restricted Stock
  3. Restricted Stock Units (RSUs)
  4. Stock Appreciation Rights (SARs)
  5. Phantom Stock
  6. Employee Stock Purchase Plans
  7. Employee Stock Ownership Plans
  8. As one of the investment option of your defined contribution plan

Talk about complex!

No matter which way they present it though, the end result is usually the same. You take them up on their offer and you accumulate more and more company stock as time goes on.

And, why not? You’ve been there for years, you love what you do, and you can’t imagine the company ever going out of business.

the Rewards

Do you want to know a potential way of getting rich? Putting a sizable percentage of your portfolio in one asset that appreciates in value.

Imagine working for Google or Facebook over the past several years and acquiring company stock along the way. You could have accumulated quite a bit of money by taking part in one of their employee stock purchase plans.

It’s rare circumstances like these that having the majority of your portfolio consist of your employer’s stock can pay off.

The risks

Do you want to know a potential way to lose all your money? Putting a sizable percentage of your portfolio in one asset that depreciates in value.

Take General Electric (GE) for example. GE is one of the most recognizable companies in the world. I bet the employees of General Electric never thought twice about owning its stock.

But it’s share price has fallen nearly 80% since March of 2016. This kind of price decline would be absolutely devastating to an employee with a majority of their retirement savings in the company stock.

Source: tradingview.com

double the risk, double the pain

No matter what your view on the financial stability of your employer is, the simple fact is that employer stock is one of the riskiest investments you can own.

By simply by working for your employer, you already have a large portion of your personal financial success tied to your employer’s success.

Your job provides you income, which enables you to save for the future in the first place. Your financial wellbeing is already dependent on your employer, adding company stock into the mix only doubles your risk. If your employer goes out of business, you lose your job and your retirement security.

How Much is too much?

Okay. You’re probably at the point where you want to sell all of your company stock. But that’s not the message I want to convey.

It’s true that I think the risk of having too much employer stock in your portfolio outweighs the potential rewards but a small portion can be part of a generally diversified portfolio.

A general rule of thumb to follow is to have no more than 5% of your investment portfolio in any single stock (not just your employer’s).

Of course, the thing about rules of thumb is that not everyone’s thumb is the same.

In order to determine if you have too much company stock in your portfolio, consider these four things:

  1. What is your appetite for risk? If you are the gambling type and can stomach the thought of your investment losing value if it means hitting the big one, then a higher allocation to a single stock might make sense for you.
  2. Do you have the ability to take the risk? If the stock drops in value by even 40%, will it totally disrupt your ability to retire? If you have sizable, diversified, retirement savings outside of your employer stock you can probably take on more risk than if you didn’t.
  3. How many years until you retire? If you are 20 to 30 years away from retirement, you have the time to make up for loses and can be a little more concentrated. If you are within 20 years of retirement, you’ll probably want to scale back.
  4. Does the stock fit into your overall financial plan? Will the stock help you achieve the rate of return you need to reach your retirement goal? There might be a specific purpose for the employer stock and it’s okay to be a little more concentrated.

At the end of the day, it takes having a well thought out financial plan to determine how you handle your concentrated stock positions, so make sure you have one!