Is a 401(k) match really “free money”?

Is a 401(k) match really “free money”?


This week’s issue of Time features an article by Stephen Gandel called “How 401(k)s Make Many Americans Poorer.” It sheds light on a new study conducted by the Urban Institute and published by the Center for Retirement Research. The study finds that employees at companies that provide an employer match to 401(k) contributions tend to have lower salaries than employees at companies that do not contribute to employee retirement plans. In fact, Gandel notes that “for many employees the salary dip was roughly equal to the size of their employer’s potential contribution.” 

The implication is that the employer’s 401(k) match makes up a difference in any decrease in salary. Looking at it another way, workers are essentially paying for their 401(k) match. 

Also, it’s important to remember that the 401(k) match is entirely optional. Hence, Gandel’s wording, “employer’s potential contribution.”  As we’ve seen since 2008, many companies reduced or eliminated completely their 401(k) match during the recent recession.

Gandel goes on to refute the study’s second finding – that 401(k) plans tend to benefit lower-income workers more than higher-income workers. The study claims that salaries for higher-paid workers drop more than salaries for lower-paid workers, when a company has a 401(k) plan. However, Gandel points out that the study’s authors overlook a key fact:  not everyone participates in a 401(k) plan, and lower-income employees are much less likely to participate than higher-paid ones. For lower-income employees who do not get a match because they do not contribute to their employer’s 401(k) plan, “working at a company with a generous 401(k) plan will actually make them poorer” because every employee gets a reduced salary, whether they contribute to the plan or not.

Gandel further notes that “even considering the different impacts on wages, the benefits of our nation’s 401(k) system still go overwhelming [sic] to the rich.” In her 2011 testimony before the Senate Finance Committee, PRC’s executive vice president and policy director Karen Friedman addresses the issue of who benefits most from the tax incentives associated with 401(k) plans. Karen notes that tax incentives “end up disproportionately benefiting the nation’s most affluent employees, who would almost certainly save for retirement even without tax incentives.”

Gandel is the author of a 2009 article, “Why It’s Time to Retire the 401(k),” which we blogged about here.

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