Should I Contribute to a 401(k) With No Match?

If there’s one piece of advice that I, and just about every other personal finance blogger has  written a thousand times it’s: “Always contribute enough to your 401(k) so that you get your employers full match.”

But what if your employer doesn’t match your 401(k) contributions? What should you do then?

It’s not a situation I ever gave much thought to. Then, right before the new year, the following email from the CEO of my company showed up in my inbox…

Needless to say, this did not make me a happy little worker bee. I had planned on making a significant increase in the amount of my 401(k) contribution, now I started wondering if I should even contribute at all.

If you find yourself in the same situation  with your employer cutting its 401(k) match. Don’t make any rash decisions, it can still be worth it to contribute to a 401(k) with no match.

My first instinct was to immediately stop contributing any money at all, and get my résumé ready as soon as possible. However once I took some time to really think about my options, here is what I chose to do:

  •  Keep my 401(k) contributions at the same level – Even though my employer doesn’t match my contributions any more, there is still the possibility of a discretionary match if the company does well enough this year. If that happens I don’t want to miss out on it.
    Contributing to my 401(k) will still lower my taxable income. There’s no reason to start giving more money to Uncle Sam just because my employer got cheap on me.
  • Increase IRA contributions – I had been planning to more than double my 401(k) contribution as part of my plan to save 50% of my income this year. Instead of saving that money in my 401(k), I’ll now be diverting it to my IRA’s (both pre-tax and Roth). The reasons for this are pretty simple. 401(k)’s have very limited investment selections and carry a lot of different fees. In an IRA I can invest in anything my heart desires, and the fees will be much lower than my 401(k) because my IRA provider offers commission free trades on a lot of basic index funds and ETF’s. This means I only get hit with the expense fee of the funds I choose (which will be minimal because I stick with Vanguard funds & ETF’s!)
  • Work on that Resume – My 401(k) match wasn’t overly generous to begin with. But the loss of it equates to about a 2.5% pay cut for the coming year. I was thinking of starting up a job search this year as it was, this will only accelerate that search.

Hopefully your company never slashes the match to your 401(k). However, if it does it’s not necessarily time to panic. Consider your options as far as contributing to IRA’s or using extra money to pay down debt. A 401(k) without a match isn’t useless though. Remember, a 401(k)’s purpose is to allow you to save for retirement on a tax-advantaged basis. Even without your employers matching funds it is still a very useful tool. Especially because it automates your savings directly from your paycheck.

Before taking any drastic action with your 401k contribution, use this calculator to see just how much your decisions will affect what your account balance will grow into. You might find that even small changes have a large impact on the future.

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Has your employer taken away your 401(k) match? If so, how did you handle the situation?

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28 Responses to Should I Contribute to a 401(k) With No Match?

  1. I hope to never have to make that decision, but I think for most people that don’t follow PF blogs, it’s probably smart to keep contributing even if it’s not really the best option. Initiating a change is very tough, so if you let that money hit your checking account, most of the time for most people, it’s not going towards retirement savings. There’s always something calling it’s name.

    • I agree, most people should still contribute. I consider myself more diciplined than most and I would still have a hard time seeing that extra money hit my checking account each month.

  2. My old employer dropped their match before I ever started, so I opted out of the 401(k). I figure I’m not anywhere close to hitting the contribution limit for my IRA and I can probably get better returns there. I know my IRA outperformed my wife’s 401(k) last year even with her employer match!

    In your situation, I would max out my IRA first and then put any leftover money for retirement contributions into the 401(k)

    • If my employer dropped the match before I started contributing, this is the route I would go. I definitley plan on funneling more money towards my IRA, but I’m going to keep my 401(k) contribution just because its already set up & I’m hanging on to the possibility that my employer will decide to make the “discressionary” match that they dangled out there.

  3. My employer cut ours over three years ago and has made no signs that they plan on bringing it back anytime soon, so my first thought upon reading this is that you were lucky to have been able to contribute over this time versus many who have already seen this disappear.

    I would (and still do) continue to contribute.

    • I am lucky that I’ve had a match this whole time, I know a lot of companies cut theirs during the recession. But it is really frusterating to have it cut now, at a time where most everyone else is rebounding and reinstating theirs.

  4. krantcents says:

    Unfortunately, I work for a government (school district) agency and there is no match. The good news is I have a pension! I max out my 401K anyway and contribute (max) my Roth IRA and my wife’s IRA.

  5. That’s a bummer man. My match was reduced from 8 to 6.6% this year so it’s still above average. I would definitely max out IRA before contributing to a 401k if there was no match since the investment options will be much better generally.

    • Ian says:

      I agree with this. You are probably going to have much more control, therefore better options with your IRA. You also could most likely set up the same kind of automation through your bank if you are afraid of blowing the extra cash that would be hitting your account.

  6. I often examine which way to go with the 401k versus maxing the IRA (after getting the entire company match that I’m still blessed to receive.
    I certainly hope that you can locate a position where the employer matches a portion. :-)

  7. That’s no fun.

    Well, I think it merits a discussion on what to do, so it’s good that you’re posting about it. I think in that case, I would evaluate the 401k options, and compare them to what you could do with an IRA. Then decide accordingly.

    Once the match is taken away, I wouldn’t be holding my breath for it to come back in the future.

  8. ScottLogic says:

    If you’re disciplined with your $$, I would recommend funding an IRA (maybe Roth, depending on your current and future tax situation) instead of the 401k, due to more/potentially better investment choices. I also don’t recommend following the Wall Street “Buy & Hold” myth, as most people don’t realize the true risk in their mutual funds. I’ve used a 401k Beacon market signal service, which has allowed me to avoid most major market corrections. This new approach has been more valuable than any company match, just wish I would have known about it much sooner.

  9. We don’t have 401(K)s and IRA’s over here but do have ISAs and SIPPs as well as sem-portable pension instruments!

    It all depends on your age and attitude. If you are young, travel, see the world and do things. With any kids and mortgage off your hands, then is the time to plan your retirement and use these tax-free systems. The best investment may then be in your own business:-)

    My $0.02!

  10. Depends on your time frames and goals.

    I want to achieve financial independence sooner rather than later, so using retirement accounts doesn’t make much sense for me. But if there’s a match, I’m all over that.

    If there was no match and I was planning a standard retirement I would first fill up a Traditional IRA (way better selection of investment options) and then work on a Traditional 401K.

  11. Martin says:

    I think it depends. If I would be asking this question in regards to my own 401k, then without employer’s match I wouldn’t invest and actually roll over into my ROTH IRA.

  12. I’m glad that you elected to continue to contribute to your retirement. If you don’t do it consistently, nobody will. In fact, I’d see this as a sign that you have to INCREASE your contributions, which you have with your IRA. I think you did the right thing.

  13. FI Fighter says:

    That’s some rather disappointing news. I’m sorry you won’t be getting a 401k match this year. I think the question to invest or not ultimately depends on your long-term goals, like others have said.

    I’m seeking early FI (retire by 33), so I would probably stop contributions if my company eliminated the match. I would fund a taxable account instead. If my timeframe was a lot longer out (10+ years), I would probably just keep investing in the retirement accounts like normal. I like the tax shelter and the fact that it’s automatically deducted from my paycheck. Since I never see the money, I’m never tempted to spend it on something else.

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  15. Wow, this is a tough decision. I think if my employer stopped the match that I would just do a Roth and regular IRA just because of the freedom they have. If I needed the tax breaks then I would consider a regular 401k, but it wouldn’t be on the top of my list.

  16. IRAs are generally superior to 401ks. So if you’re not getting a match just switch your investment dollars to an IRA. If you’re already at your IRA max, then it’s up to you to decide whether the 401k is better than using taxable accounts.

  17. I have an IRA and put in the max every year. However, my wife has a 401K with a match that is worth it. It’s opportunity cost? What else could you do with the money? That is the question.

  18. Thomas says:

    If you are knowledgable about your finances then I say no max out other vehicle first. But most people I know don’t need a lot of options and the 401k keeps the money out of their hands and in a safe place. For them I say put as much in and let it grow. It sucks that they don’t match.

  19. We don’t have these problems in the UK generally. If there is a company scheme, the company will pay their share (which can be more than the employee pays). Rarely a company will be allowed to reduce contributions but that got some companies into hot water some years ago. There is a financial reporting requirement for companies that run pension schemes which now says that they have to value the scheme every year in the annual report. This has meant enforced additional payments by companies. In fact it is a little unfair because it depends on the stock valuation on the day the report was prepared whereas the liabilities extend at a low level into the future. However it is better than finding that the company has stolen the pension fund, which happened in one well known case.

  20. I think yes! No matter what, you are still responsible for your own retirement.

  21. I definitely think that we should continue to contribute to a 401k that cuts the employer match. That is just a secondary benefit to an account that already provides a tax advantage. So you can still benefit greatly by contributing. It’s just that the other ways to save for retirement become a little more attractive.

  22. Spencer says:

    I’ve never had a 401k match (we call it the TSP or Thrift Savings Plan in the military) but I finally started making the maximum contribution this year. The gov’t matches civilian contributions to the TSP but not military. However, we can contribute our tax free deployed income into the Roth TSP and then withdraw it tax free as well. Tax free money for life! The TSP has many other advantages beyond a regular 401k, so I’ll definitely keep contributing.

  23. brian says:

    I don’t get a company match and don’t contribute anything to the 401k (not great options though the expenses/fees aren’t outrageous ~ 1.3%), but I am maxing out Roth IRA’s for me and the wife…we make too much to get any tax benefit for Trad IRA. What we are doing is putting extra money towards our adjustable mortgage…rate is low, but I am afraid it’s going to jump sooooon. I can’t refinance due to CH 13 BK…I feel like I’m making the best decision with where the market is at right now (all time high with P/E ratio and Schiller ratio also telling me market is overvalued).

  24. Ed Mills says:

    As teachers, my wife and I have access to 403b and 457 plan with $0 of employer match. Nonetheless, we try to fully fund both accounts because they 1.) minimize our taxes and 2.) maximize our wealth. We also fully fund our IRA accounts at Vanguard. When we leave a teaching job, our 403b contributions are rolled over to our Vanguard IRA accounts. Because 457 accounts lack the pre-59.5 early withdrawal penalty, we use them as a savings-emergency fund. (Of course, we can’t get to 457 funds until we separate service from a job…ie, quit).

    The Millionaire Educator

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