Imagine you took all of the financial advice on the Internet, put it in a pile, and sorted through it. If you threw out any piece of advice that contradicted another, how much content do you think you’d be left with in the end? I’d guess almost nothing; remember, this is the same Internet that can’t agree on the color of a dress.
But I can think of one financial factoid that would make it through the mesh of cyber-noise:
Always max out your company match.
A company 401(k) match is free money, and in most cases an immediate 100% return on your investment. There is no stock on the planet that can promise that kind of one-day return. No one disagrees about this, right?
Well…I don’t want to say I disagree, exactly. However, I do want to add a but, because there’s more to this story.
Because what, exactly, is this match? Is it mutual funds? Bonds? Gold bars? The fact is, in a 401(k), the employer can choose what the match will be. In many cases, that match comes in the form of company stock. Sometimes it’s actually called “Company Stock” and other times it comes under an acronym like ESOP (Employee Stock Ownership Program). In both cases, you’re getting the same thing: a piece of ownership in your employer.
This isn’t a bad thing, in small doses. The problem is that after a lifetime of receiving a 3-6% match, your 401(k) may be more than 50% invested in a single company. This is a ticking time bomb. Events that affect one company, one geographic location, or one sector of the economy could have an outsized effect on your ability to retire on time.
This exact thing happened to me. As a young lad working for a giant corporation, I watched my 401(k) seesaw up and down as the general market stayed flat. Having as much financial knowledge as the average twenty-two year old (read: none), I couldn’t make heads or tails of it. Only after a lot of research did I discover that half of my retirement savings were in an ESOP. I quickly switched it out.
While some companies keep the match untouchable for a vesting period, eventually it is possible to move money out of company stock. The sooner the better.
Unfortunately almost no one does. Brightscope, a company that researches 401(k) plans, shows that six of the largest ten companies in the S&P 500 list company stock as their largest asset under management.
Exxon Mobil Corp.: 60%
Wells Fargo & Co.: 30%
Johnson & Johnson:19%
General Electric Co.: 40%
JPMorgan Chase & Co.: 16%
Procter & Gamble Co.: 38%
At the most extreme end, a full 60% of Exxon’s 401(k) investments are in company stock. Exxon is a great company, and a literal gusher of profits, but do you want to bet your retirement on a company with one product whose price dips and dives based on unpredictable global events?
There are exceptions. Technology companies and their employees get credit for keeping their 401(k)s diversified: the accounts of Apple, Microsoft and Google are dominated by Vanguard and Fidelity mutual funds.
I like to think twenty years back. What were some of the top companies in 1995 whose employees owned mostly company stock? I’ll give you a hint: some of them aren’t even around anymore, and one was named Enron. Bigger picture, most of the companies that have ever been no longer exist, period. That’s the nature of capitalism, and it’s the biggest problem with company stock ownership: it sets you up for a financial one-two punch. If your company suffers a decline, or ceases to exist, your 401(k) plummets just as you’re given a pink slip. The very concept of diversification exists to safeguard against this problem.
So I won’t argue with the personal finance gods. Take the match if you can. It’s free money, after all. But know what you’re getting, and be ready to get rid of it.