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I am looking for some advice as to how much I should contribute to a 401k.

I am considering taking a job at a place that has a worse 401k plan than I currently have - 6%, half matching. The plan has a vesting schedule for 5 years, 20% per year.

My base salary will be 130k.

If I start employment there, should I put money into that 401k from the start? For some background, I am 28, and I have never worked at a place yet that I stayed at for 5 full years. Are there better options for me to put my money into something else besides that plan?

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Math - The half-match is 3% or $3900. After 5 years, $19,500.

If you stay, you are vested, and have $20K (I hope it's actually far more) extra. For you, it's like 2 month's salary bonus after 5 years.

If you leave early, the good news is that even if the expenses within the plan weren't great, you have the money you put in, along with what vested so far. You move that to an IRA and choose your own thrifty funds or ETFs.

For me (as Duff said, there's no one answer, so to be clear, this is my feeling, or preference, not gospel) 6% is far too little to save as a percent of my income. So if the 401(k) fees ran say .8% or higher, I'd put in the 6% to get the potential match, and then save on the side.

Our answers might change slightly depending on the exact fees you're exposed to.

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    Joe, and @Derek too, is this 401k plan limiting employee contributions to 6%, half of which will be matched by the employer, or is it the employee who is deciding that 6% is all that can be afforded to put away for retirement in the 401k plan in the current circumstances? Also, aren't 401k fees a fraction of what is contributed (more usually, plan assets held in the name of the employee) instead of a fraction of salary? That is, the 401k fee is 0.8% (say) of what is contributed, (say 6%), and so the cost is actually 6% x 0.8% = 0.048% of salary, not 0.8% of salary? – Dilip Sarwate May 26 '12 at 1:04
  • I read Derek's details to mean the first 6% of salary deposited is matched,with the company adding 3%, but no more. (Then it's vested over time). Yes, my .8% example is the annual yearly fee, 80cents per $100 invested. My position is that 1% or over, and 10 years in the fund kills much of the potential tax benefit, so 'depositing' to the match' becomes my advice. Sorry if my response was ambiguous, thanks for clarifying. – JTP - Apologise to Monica May 26 '12 at 2:23
  • Sorry I was not responsive earlier. The 6% is just what they match, I suppose I can put in as much as is legal to add. – Derek Jun 19 '12 at 20:38
  • @Derek - My answer stands, I'd deposit to the match for sure, any more than that is a decision based on the fund choices and expenses. – JTP - Apologise to Monica Jun 19 '12 at 21:21
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Yes. Not doing so would be like turning down a raise. The best advice in almost every situation is to at least contribute up to the amount that the company will match so you get the full benefit.

One thing to clarify that you might not be understanding. The vesting period is only for the money the company matches, not your own investment. Even if you leave the company before the account is vested or fully vested, you can transfer to a 401k at your new employer, or roll over into an IRA, or take as taxable income (and pay a penalty if it is an early withdrawal), all your contributions together with any investment gains or losses that have occurred. Ditto whatever part of your employer match that has vested by the time you leave. Often, the employer matching contributions are invested in the same funds in the same proportions that you have chosen for your own contributions and thus will have incurred the same gains or losses as your own contributions, but what you are entitled to take with you is the part that has vested.

Also, you mention that it is unlikely that you will stay the entire 5 years. However, if you plan to at least stay a couple of years it makes sense to get the 20%, 40%, etc. of the match that you vest during your stay. Again, it's free money.

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    100%, John. Your deposit is always 100% yours. The matching is what vests. – JTP - Apologise to Monica May 29 '12 at 17:41
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    A clarification on @JoeTaxpayer's comment: the amount contributed (deposit) is not what is 100% the employee's to rollover into another 401k or an IRA etc; it is the amount that is in the employee's account that can be rolled over. If the amount contributed was invested and increased in value, all that belongs to the employee. If the investment decreased in value, too bad: the employee suffers the loss too. Upon separation, the employee does not get the amount he contributed or deposited, he gets the amount in the account, which may be more or less than the amount contributed. – Dilip Sarwate May 29 '12 at 22:08
  • Your deposits, along with the investment gain or loss, are yours. Better? Thanks Dilip, again. Unambiguous writing is an art. I'm still learning. – JTP - Apologise to Monica May 29 '12 at 22:12
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There's no one answer.

You need to weigh the fees and quality of investment options on the one side against the slowly vesting employer contribution and tax benefits of 401k contributions in excess of IRA limits.

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It's still tax-deferred savings, unless the fees are terrible it's going to be better than investments that aren't tax deferred.

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My answer would be yes.

In addition, I'm not sure that anything requires you to roll your current 401(k) into a new one if you don't like the investment options. Keeping existing funds in your current 401(k) if you like their investment options might make sense for you (though they obviously wouldn't be adding funds once you're no longer an employee).

As for the terms of the potential new 401(k), the matching percentage and vesting schedule match what I've seen at past employers. My current employer offers the same terms, but there's no vesting schedule.

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    While it is not generally required that funds in a 401k be rolled over into an IRA or another 401k upon termination of employment, there is little reason to leave the funds with the previous employer because the annual maintenance fees will continue to be charged. You could have the same investments (say in VFINX) in a Vanguard IRA and avoid the fee altogether. Now, if there is an investment that you cannot get outside the 401k (stock in the company that employed you, with a DRIP plan attached?), that is a different matter. In most cases, rollover into an IRA, invested in ETFs, is better – Dilip Sarwate May 30 '12 at 19:48

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