Smart Reasons to Save, Use and Invest Money

Losing Free Money By Not Participating in a 401k Plan

I once had this friend (let’s call her Daphne) that was a brilliant, vibrant account executive at a large financial company.

I was always impressed by this individual, both with her energy and how fast she processed information.  One day we met up for lunch and discussed stock market investing strategies.  I was shocked to hear that while Daphne had a regular brokerage account and did some trading, she didn’t participate in her employer’s 401k Plan.  To me, her not being in a 401k was analogous to a dolphin that doesn’t like to get wet!  I was amazed!

Assuming that her employer’s 401(k) plan was horrible with no match, I commented something along the lines of “your employer’s 401k suck, huh”.  Daphne then told me no, in fact she said it was quite generous.  Obviously now I was curious, so I asked about the details of her 401k plan.  She said that they matched 200% on the first 1% of the participating employee’s salary, then 100% the next 4% of the employee’s salary.  Such a plan is very respectable!

Actually it was the first time I had heard of a 200% match, that was pretty amazing in my book.  so I asked her if she contributed at least 1% of her employer’s 401k plan.  She said “no”.  No? I said incredulously.  “No”, she said again.  Now I think it’s crazy to pass up 100% match on money, but to pass up a 200% match just seems stupid?

So I asked “Why”, in a voice that was a bit too high-pitched (think of when you hear people say “Really” in such a tone).

She explained to me about how she was divorced and money was tight, then she said that all her relatives have died early and she expect to go out the same way.  When I heard this, I thought “But you have 2 kids?”.  Just being a friend though, I had to nod my head acknowledging that it sounds tough.  But then I said, perhaps she could do the 1% then do a hardship withdrawal, but she said the paperwork wouldn’t be worth it.  And I understand her point, so we parted ways after a great lunch.

 

1 Year Later…

About 1 year later, we were at lunch again, celebrating that she got a promotion (a 50% increase in pay, very impressive) at work.  After an entertaining and fun lunch, I asked if she decided to open a 401k now that she has a lot more money.  Surprisingly, she said NO.  I was at a loss for words.  How could a person that is physically beautiful and mentally gifted not see the value in contributing to such a generous 401k plan?

This was the first time I began to believe that even smart people make bad financial moves sometimes.  My friend has since move to a different state (her employer is very large) and I’m bad at keeping touch.  I wish her well, and hope that she finally broke down and decided to participate in a 401k plan…

What do you think of my friend?  Do you think that she is afraid that she will jinx herself by opening a 401k plan?  Perhaps she believe that if she does, she will die earlier since her family dies early…

Why would an otherwise brilliant person not take advantage of free money?

Bests,

MR

16 Responses to Losing Free Money By Not Participating in a 401k Plan

  1. Wow – It is so hard to believe that story. But, on the other hand, I know some people that prefer a simple way of investing and even if another great opportunity comes their way, they would prefer to stick with what they know. I don’t think this philosophy applies to this situation, but it always suprises me (too).

  2. I have no explanation for that behavior. It doesn’t make sense to pass up a guaranteed return of 200% on your investment. It is like having someone come to your door, offer you a stack of $100 bills and turning them down. Doesn’t make sense.

    • She kind of artistic, but I know she understands math too. I think she just wants to live it up now instead of saving… It’s the typcial grasshopper and the ants story.

    • Yeah, I see a lot of co-workers who abuse their 401k’s by taking out loans and even declaring hardship withdraws (actually I only know 3 people who took out loans, and just 1 that took a hardship withdraw).

      Then again, maybe I’m wrong and the gov will bail them out in the future…

  3. We don’t have 401K’s in Canada but some of us have employee pensions. Not participating in them would be such a mistake since we get an employer match on our contributions. It really is throwing away free money. Thanks for making this so clear!

    • I know I definitely wouldn’t throw that money away. She really is worried that she will die young so it doesn’t matter. I hope she’s wrong, but it’s going to be rough for her if she is wrong…

  4. Here is a good example of why automatic enrollment into a 401K helps. Even if she started very small, she might be motivated based on the painless growth.

    • Me neither! I was pretty shocked when I explained to my friend how to get the money she put in back if she needed to, and even then she wasn’t interested… very odd.