Why 401(k)s Matter to Your Job Hunt

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.

One person receives a 3 percent match; the other receives no match.

Assume each contributes the same 6 percent of his salary to the company 401(k), receives 2 percent annual pay raises and earns a 7.5 percent average annual rate of return.

In 35 years, the person receiving the 3 percent match would accumulate $864,735 by age 65. The person receiving no match would accumulate $576,490.

Are job satisfaction and other factors going to be enough to make up for the $288,245 difference?

Remember, no match, no deal.

This work is the opinion of the columnist, and in no way reflects the opinion of ABC News.

David McPherson is founder and principal of Four Ponds Financial Planning (www.fourpondsfinancial.com) in Falmouth, Mass. He previously worked as a financial writer and editor for The Providence Journal in Rhode Island. He is a member of the Garrett Planning Network, whose members provide financial advice to clients on an hourly, as-needed basis. Contact McPherson at david@fourpondsfinancial.com.