There are a few benefits of regular contributions to your 401(k), even without matching funds:
- Benefiting from Dollar Cost Averaging (DCA) or periodic investing
- Missing a large run-up in the market
- Potentially not being allowed to make $18k of lump sum investments in the new 401(k) plan
First, you can take advantage of Dollar Cost Averaging (DCA) and average out your investment dollars regardless of whether the market goes up or down, thus reducing the risk to your investment.
It's a strategic way to invest because you buy more shares when the
cost is low, so you get an average cost per share over time, meaning
you don't have to invest the time and effort to monitor market
movements and strategically time your investments. (For more on how
dollar-cost averaging works, see DCA: It Gets You In At The Bottom.)
This Bogleheads article make a distinction between dollar cost averaging and periodic investing:
Most investors make regular contributions through their 401(k) plans
or by having a set amount auto-deducted from their bank account into
an IRA or taxable account. When this money is automatically invested,
it has the same benefit of dollar cost averaging that you buy more
shares when prices are low and less when they are high. However, this
form of investing is not dollar cost averaging. It is called periodic
investing. The difference is that periodic investing is maximizing
expected return, because you are investing the money as soon as you
have it. DCA applies when you have the money to invest, but delay
Second, if the market makes a large surge during the period where you're not making contributions, you could be missing out on some significant gains. The converse, of course, is also true - you may miss out on a large dip in the market.
This Marketwatch article notes that:
Charts like the one below show the damage an investor would have done
if they missed out on only the 25 best days (of 11,620) since 1970. If
you somehow managed to do this, your returns would have gone from
1,910% to 371%, or 6.7% a year to 3.4%. To give you an idea of how
lousy that is, 1-month U.S. T-bills returned 4.9% over the same
While you're likely to not miss these days due to your previous contributions to the 401(k), you're risking that a large portion of your year's contributions would not be participating in the rise of the market.
Finally, the last point revolves around your new company's 401(k) and payroll policies. Some key questions to ask:
- How soon will you be able to contribute? There's usually a delay of a pay period or two before HR/Payroll have enabled your account for contributions.
- How much can you contribute before the end of the year? Depending on how much time is left in the year (a quarter?), does your new company's payroll system allow you to make large enough contributions to max out your annual $18.5k max? Some companies restrict the maximum contribution per pay period to a certain percentage of the employee's pay, and might not be flexible enough to allow very large contributions to "top off" the max for the year.
While saving the entire $18.5k max contribution for the new company's 401(k) may make sense to maximize the gain from the company match, you may want to consider putting at least some funds into your current company's 401(k) for the reasons noted above. An amount smaller than your regular contributions into the old plan can be put in place while you prepare for your new 401(k) with matching funds.