Saving money for retirement is generally accepted to be a good idea. Getting someone else to save some money for your retirement is also a pretty good idea. So when someone comes out saying that all this saving and matching saving is not such a good idea, you have to stop and see what they are saying.
Steve Gandel, writing in Time, asserted just that.
Many companies offering deferred compensation retirement plans (like 401(k)s or SIMPLE IRAs) will match some (usually the first 3%) of the employee’s contribution. This means that if you pitch in 3% of your income to your 401(k), your employer will also put in the same amount. Advisors like myself like to call this “free money” because it pretty much is.
Stephen writes:
Well, it turns out that money isn’t exactly “free.” In a sense, it’s actually coming right out of your paycheck.
What is less understood is that even the money that employers contribute to those accounts is really coming from workers as well.
All else being equal, they found that workers at companies that contributed to their employees’ 401(k) accounts tended to have lower salaries than those at companies that gave no retirement contribution. In fact, for many employees the salary dip was roughly equal to the size of their employer’s potential contribution.
To say the ‘employer match’ is coming out of the worker’s paycheck is missing the point. That implies that if the employee did not participate, they would get that 3% anyway. No, they won’t. The only way to get that 3% is to participate, and contribute.
Of course the money has to come from somewhere! Nobody should be too surprised that a company takes benefits into account when coming up with a dollar salary for a given employee. A key benefit to the 401(k) is the forced savings.
The author notes the good news though, lower earning employees salaries are less affected by the presence of an employer match, pretty much confirming exactly what everyone means by “free money”, even without the chance you may be giving up a bit of salary for that benefit.
What’s more, the conclusion that Toder and Smith draw from their data is that for low-wage workers 401(k) plans might actually be a bit better than is thought… A low-wage female worker salary drops only by $0.11 for every dollar of company match. The salary of a low-income male worker drops by $0.29. Combined 401(k) contributions and compensation of a low-wage worker at a firm that provides a 401(k) match is higher than that of a peer at a firm that doesn’t offer 401(k) contributions.
He then turns back around to defend his original silliness saying:
The problem with Toder and Smith’s analysis is that not everyone participates in their company’s 401(k) plan. And low-wage workers tend to have much lower participation rates than high-earners.
This is just a good argument for increasing participation, though. Combine this with the aforementioned benefit and BAM! you get exactly what financial advisors have been saying for years. Basically the article has completely canceled itself out at this point.
He ends by trying to revive his absurd disgust with retirement savings by blathering on and contradicting his earlier (contradictory?) statements.
Many low-wage workers can’t afford to defer a portion of their salary for later. Also, Social Security… may be all they need. So not participating in a 401(k) might be a rational choice.
Firstly, yes, not being able to save money is a sad fact of low wage employees. That is one thing that financial planners do, try to help people save more money. An article in TIME is not going to upend the value of saving money. Secondly, as a financial advisor who has seen many people’s social security statements and looked at their financial needs – it is generally not enough. Period. It is nice, and many people can make it work quite well, but social security is not going to keep most people comfortable in retirement. Some people may be able to eke it out on social security in retirement, but it is ignorant to suggest that people should not try another option. I guess from his desk at TIME he may not have the opportunity to learn that most people still need to be encouraged to save.
For a giggle, here are two actual sentences from the article.
…the conclusion that Toder and Smith draw from their data is that for low-wage workers 401(k) plans might actually be a bit better than is thought.
The bottom line is that 401(k)s for many poor workers are not a better deal than we had thought.
Ok. Researcher v TIME Journo. It’s on.
For a bit more context, the author is looking at 401(k)s as a raw deal compared with guaranteed income pensions. Fewer and fewer companies offer pensions; it is a good thing that some offer any type of retirement savings mechanism! If he is downing 401(k)s for taking money from employee salaries, where does he think that pension funds came from? Yes, 401(k)s put the onus of saving onto the worker, saying they are terrible is an insult to any worker who recognizes it is their responsibility to prepare for their own future.
