401(k)

This is the fourth in a set of posts about our pension plans. Here are links to the overview, the Defined Benefit Plan, and the Individual Account Plan. Steve also gave some of the 401(k) backstory here. The first question that always comes up with the 401(k): Is there a matching contribution from the employer?" The answer is no, simply because the employers are already making substantial contributions to the DBP and IAP. With our pensions we have the best of both worlds -- substantial and automatic employer contributions to a couple of retirement plans, and a 401(k) that allows us to maximize our retirement savings in a flexible way. Here are the specifics of our 401(k): - You're eligible to sign up after 90 days at any union studio. - Sign-ups happen quarterly -- the next deadline is April 1. - You can contribute between 2% to 40% of your weekly paycheck. - The current max contribution is $15,000 per year, or $20,000 if you're 50 or older. - There are 29 different funds in our 401(k) for you to chose from. The trustees meet regularly to "weed out" and replace underperforming funds. We just met last week and targeted two weak funds that will be replaced. Remember that 401(k) contributions are pre-tax. That means that if you contribute $100 per week, you paycheck will only drop by $65-80, depending on your tax bracket. And the earnings on the 401(k) grow tax free. Also remember that with compounded interest working for you, the earlier you start your 401(k), the more dramatically it will grow by retirement. You can also borrow from your own 401(k). This is potentially dangerous, since if you're late on a single payment the loan will be considered an early withdrawal, with interest and penalties due. And if you lose your job while the loan is out, you have to repay the entire loan immediately, which is obviously a bad time for such a contingency. So start your 401(k) now, or increase your percentage contribution if it's low. You'll be glad you did come retirement. On Matching 401(k)s Because the issue of matching vs. non-matching in the 401(k) comes up fairly often, and because this is the only retirement vehicle at some nonunion studios, I wanted to write more about it. A few years ago, during the tech-stock boom, one of our members asked why we were stuck with "your father's pension" (i.e., the DBP) instead of a modern plan like a matching 401(k). He was sure that he could invest his retirement savings far more effectively than the professionals who run the DBP and the IAP, and he was thrilled with the rapid growth he'd seen in his aggressive 401(k) investments. A couple of years later, after the tech crash swept away much of those huge "profits," I asked him if he still felt that way. He sheepishly expressed his gratitude for our old fashioned IAP and DBP. Not long ago I compared the maximum employer contribution for a matching 401(k) to the combined employer contributions to our IAP and DBP. I used Sony Imageworks' plan as a relevant example of a matching 401(k). It was eye opening. I used the "best case" for the Imageworks example -- someone who stayed there until they were fully vested, and who maxed out their 401(k) so they got every bit of the employer match. The union plans were the clear winner. Many people don't realize several things about matching 401(k)s. First, if you don't maximize your employee contribution, you don't get all the employer's match. Studies show that only 70% of people who are eligible for a matching 401(k) bother to even sign up! So they get zero pension benefits from their boss. And of that 70% who do sign up, only about 70% of them make the maximum contribution, and get the full employer match (70% of 70% is 49%, so slightly less than half of eligible employees get the full employer contribution). No wonder employers prefer matching 401(k) plans to Defined Benefit plans -- most employees leave some, or all, of the employer's contribution on the table! Second, most matches are not dollar-for-dollar matches of your contributions. Some match as little as 20%, so that you must get up to $10,000 in personal contributions to get the employer's $2,000. And most matches are capped, so they are at most a few thousand dollars a year. Third, people fail to realize that most matching 401(k) plans have a 6-year vesting. That means you get no match for the first year, then 20% of the potential match each subsequent year, until you get to the full match. Leave the company before the sixth year, and you leave behind a chunk of your pension. And fourth, many matches are in company stock. It's well known that it's a bad idea to have significant investments in the company you work for. If they hit hard times, not only is your job in jeopardy, but your investments may be, too. So if you're ever going to work for a company that touts its matching 401(k), look closely. Yes, a matching 401(k) is absolutely better than no retirement plan at all, but I have yet to see a matching 401(k) that comes close to our combined pension plans.