The 401-K Puzzle
Sunday, August 16, 2009 | Comments Off
Government is often criticized for putting all its efforts into helping business and nothing for the ordinary citizen. However, when they do put programs in place we have a tendency to ignore them.
Here’s just one example:
A 401-K plan usually involves an employee putting up to 6% of their salary into a company sponsored program. Typically the employer increases that contribution by adding in up to 50% of what the employee puts in. (this is increasingly being reduced but is still at least 25% in most cases). This means the employee is getting between 25% and 50% interest on their savings, plus their contribution is exempted from Income Tax for the year it is made.
So how come only 7% of people eligible for this benefit actually use it up to the max allowed? (Source Putnam Investments).
How come 20% of participants in these plans have actually reduced the level of contribution during the past 2 years?
My guess is that a large number of these people would like to maximize the use of these plans but don’t know how it could be done.
I also suspect that a large percentage of them could solve the problem with a mortgage better suited to their circumstances.