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401k Mistake: Not Accepting Free Money

We all know (or have read about) people who are eligible for a 401k match, but who don’t contribute enough to get the maximum employer match. Big mistake, but nothing new there.

I’ve always assumed that the reason that people don’t take advantage of employer matches is that they don’t want to have to put money away until they’re almost 60, or perhaps because they’re not comfortable investing in the options provided in their 401k.

However, I just read about a study done by a trio of Yale and Harvard professors (James Choi, David Laibson, and Brigitte Madrian), which found that the same thing occurs among nearly 50% of workers who are already 59 1/2.

This is astonishing to me. These people could simply contribute money, have it invested in a money market account, receive the employer match, and take the money out right away! It’s literally free money without having to wait several years like the rest of us.

And yet 50% of eligible people aren’t doing it.

I can only think of two things that would lead a person to make this mistake:

  • A lack of understanding of the system, such that they’re unaware of this opportunity, or
  • Sufficient procrastination such that they never get around to enrolling in their 401k.

The authors of the study seem to think that procrastination is the primary cause. They argue in favor of automatic enrollment in employer retirement plans. Personally, I’m a big fan of automatic enrollment.

But I have a hard time believing that it’s just procrastination. I suspect that most people, if they were handed a form and told “Fill this out, and we’ll give you an extra $54 each month with no catch,” would probably take the time to fill out the form.

What do you think?

Why do people pass up on free money like this? And should employers (or the government?) be doing something to make sure this doesn’t happen?

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  1. I think a lot of people equate 401k with stocks. I can’t tell you how many people have said “I would invest in my 401k but I don’t know anything about stocks”. A lot of people don’t know that you can invest in more than just stocks in 401ks and IRAs.

  2. Well its not really free money looking at the market today. If I spend 10 dollars extra and then the company matches it only to see my portfolio go down by half….doesn’t make sense then.

  3. Dave: I bet you’re right.

    Manshu: But there’s nearly always a money market option in a 401k. Contributing money to a money market, receiving a match, and taking it out later that week has almost zero risk of a decline in value.

  4. @Manshu: Thanks for proving my point!

  5. This has always baffled me. It’s free money. I actually wrote about this a while back (search “pitiful 401k” on my blog). It definitely is odd that people won’t take the free money offered to them.

  6. Hi NDP. Thanks for commenting. 🙂

    Yep, I remember that post. I even commented on it regarding my wife’s 401k.

  7. John Moses says

    I work for a large publicly traded company and I do not take advantage of the match. I would love to be able to take the match and just invest in cash, safe bonds, or an index fund. There is only one “Fixed Asset” fund and it is -5% for the year!!! The others are all high risk equity funds and get this: only 1 of the investment options are above the average based on the index fund that they reference to. So until they offer index funds or some other safe investments I will be paying off debt and investing in my Roth IRA in safe 5-star funds.

  8. Hi John. Thanks for stopping by and commenting.

    That’s unfortunate that your 401k has such unpalatable investment options.

    Depending upon how large the match is though, you might be substantially ahead of other non-employer-subsidized investment options–even after a 5% loss.

    That said, I doubt I’d ever call paying off debt or investing in a Roth a mistake. They’re both great things to do with your money.

  9. Mike, Dave – That makes so much more sense now. Thanks for enlightening me!

  10. No way. You guys have been snowed into believing that you are getting ‘free money’. 401k or any other government plan to trap your money for 30 years in the market will never be a good idea.

    But, 401ks are an investors dream because they have been the most effective tool to trick people into investing their money who have to idea what to invest in and therefore needed an investor.

  11. Curt, we obviously disagree about where the market will be in 30 years.

    But that’s not even what I’m talking about here. I’m talking about people who are already 59 1/2 who can contribute money and withdraw it right away with no penalty. For them, it really is free money (especially if they can just put it in a money market for the couple days that it would be in their 401k).

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