401(k)’s are a great place to start investing for your retirement and many companies will match a portion of your contribution. Take that free money! With this match comes details you’ll want to be aware of. With open enrollment right around the corner, this makes for a great time to review this benefit.
Read the Fine Print
Some companies will match your cash with their stock. Example – You contribute $500 per month to your 401(k) and they match that with the same value from their stock. You might wonder why a company does this. There are a couple reasons:
- Employees feeling motivated by being a shareholder
- More shares in the hands of employees which are likely to support Board of Directors
- They don’t want to give up their cash
Many of us have been there where a company offers company stock in the form of options, RSUs, or ESPPs. Each of these can be used to increase your wealth, but holding onto company stock longer than necessary is not your best option.
If you’re working for a publicly-traded company, you never know which way those quarterly results are going. For a private company, there’s just as much volatility, with even less transparency.
Additionally, it’s not recommended to keep any significant portion of your wealth in your company’s stock. You’re already invested with them from a salary perspective. Keeping a large portion of company stock doesn’t bode well for diversification, which is key to healthy investment growth.
Get Into Action
If you do find yourself in this boat, it’s time to do some investigating. Find your company’s documentation on their 401(k) plan or talk to your HR partner. See what it says about that match and the flexibility involved.
If they do match with stock, determine when you’re able to sell that stock. In many cases you can do it right away. Move those funds into a more sustainable retirement vehicle, likely the one your own contribution is going toward, i.e. index funds, mutual funds, target date funds, etc.
Note – There can be tax implications depending on the action taken here. If you want more detail, talk with a tax professional.
Conclusion
There are many areas in the world of personal finance that put us at a deceptive disadvantage and employers are no different at times. Whether it’s deceptive marketing or pure lack of communication, you have to be your own advocate. When enrolling in a 401(k) program, read through the fine print. The extra work is well worth your time.
