No match, no deal.
If you're out hunting for a job, that's what I would tell prospective employers when it comes to a 401(k) plan.
An employer contribution that matches a portion of what you save in a 401(k) or other workplace retirement savings plan, should be a minimum requirement when you're out looking for work.
The overall quality of a 401(k) plan is a critical factor for workers as the traditional pension plan disappears from the private sector workplace. A lousy retirement savings plan can leave you with hundreds of thousands less in retirement.
So, if you're out looking for a job now, or expect to be looking soon, here's what to look for in an employer contribution to a 401(k), 403(b), SIMPLE IRA or other retirement savings plan.
First, any employer of a decent size should offer a contribution that amounts to at least 3 percent of your salary. This may be a stretch for some small employers or startups, but it should be the starting point for most companies.
There are a variety of ways the 3 percent figure can be calculated. Some employers may offer a dollar-for-dollar match of what you contribute. Others will kick in 3 percent, even if you contribute nothing.
The most common formula is one in which the employer kicks in 50 cents for every dollar you contribute, up to 6 percent of your pay.
Whatever the formula, your bottom line should be that the employer's contribution amounts to at least 3 percent of what you make. Anything less and I'd keep looking.
Come across a job that offers more than 3 percent employer contribution, and I'd give a good, long look at that position. Even if the annual salary is less than a similar job elsewhere, a generous employer match may make up the difference, particularly if it's a job you think you're likely to stick with for many years.
In addition to the size of the employer contribution, a second factor to consider when it comes to evaluating a company 401(k) is the form of contribution: Cash or company stock?
I prefer cash. I'd be real careful before accepting a job that offers company shares instead of cash as a match.
A stock match is a sign the company managers are looking to offer a 401(k) on the cheap and are not concerned about the retirement well-being of their employees. If they were concerned, they would not expose their workers to the high degree of investment risk that comes with holding a large portion of your retirement portfolio in a single stock.
There may be scenarios under which it makes sense to accept a job that comes with company stock contributions, such as if the matching amount is particularly generous. But you have to be real diligent to make sure you sell shares on a regular basis to avoid overconcentration in this single investment.
If a would-be employer restricts when company shares may be sold in a 401(k) plan, then I'd keep job hunting.
I should note that my warnings about company stock apply to 401(k) plans. If a prospective employer offers stock options or an employee stock purchase plan on top of a sound 401(k), that's an offer worth considering. Again, just be careful to avoid placing too much faith in a single company.
Finally, to illustrate why a 401(k) match is a critical issue when job hunting, let me provide an example.
Consider the potential difference in retirement savings for two 30-year-olds, each making $50,000 annually in similar jobs at different employers within the same industry.