Matching but no investing, or investing but no matching?

Question

(This is a simplified version of an earlier question I posted - I want to try to get back to basics so I can understand the principles involved in my decision)

Given the following two options:

1. Employer matching 1% of gross pay in an IRA with heavy fees for active investing and the opportunity to buy stocks with a fee of $50 per 10 shares (but having your money sit in savings account purgatory until you can make a large enough purchase that the frictional cost won't kill you);

2. Not taking the employer matching but taking the same amount of money and investing it in the same securities you would have in scenario #1, but this time taking advantage of lower brokerage fees and making better use of dollar-cost averaging, etc.

Is it worth it to take the 1% matching? What are the deciding factors (taxes? the match being so large as to eliminate any worry of your money essentially sitting as cash? something else entirely?)

*edit re: fees - the fees are pretty much only levied when you actively invest with the brokerage (e.g. $50 per 10 shares if you buy stocks on your own, or significant management fees if you go with the funds that they offer). If you just match, then you don't get hit with the fees, but you get an interest rate that is comparable to a brick-and-mortar bank checking account.

Answer 1

It sounds like they are matching your IRA contribution dollar for dollar up to 1% of your salary. Think of that as an instant 100% yield on your investment. (Your money instantly doubles.) My 401(k) has been doing pretty well over the last year, but it will take several years before my money doubles.

So you can let it sit in cash for a year, then take some pretty hefty fees and you will probably still come out ahead. (Of course it's hard to say without knowing all of the fees.)

Answer 2

It's simple. At 100% match, it would take a "long" time for bad fees to negate the benefit. Longer than the average person stays with one company.

Even though $50/10 shares is crazy, if you wait till you have $500, it's 10%. Still crazy, but you are still getting 90% of the match.

I'd avoid this, however, and just go with the closest thing they have to an S&P fund. Invest outside this account to save the right amount to fund your retirement. 2% total isn't enough, obviously.

Answer 3

I don't think it has to be either-or. You can profitably invest inside the SIMPLE. (Though I wouldn't put in any more than the 1% it takes to get the match.)

Let's look at some scenarios. These assume salary of $50k/year so the numbers are easy. You can fill in your own numbers to see the outcome, but the percentages will be the same.

1. Let it sit in cash in the SIMPLE. You put in 1%, your employer matches with 1%. Your account balance is $1,000 (at the end of the year), plus a small amount of interest. Cost to you is $500 from your gross pay. 100% return on your contributions, yay! Likely 0-1% real returns going forward; you'll be lucky to keep up with inflation over the long term. Short term not so bad.

2. Buy shares of index ETFs in the SIMPLE; let's assume the fee works out to 10%. You put in 1%, employer matches 1%. Your contributions are $500, fees are $100, your balance is $900 in ETFs. 80% instant return, and possible 6-7% real long term returns going forward.

3. Buy funds in the SIMPLE; assume the load is 5%, management fee is 1% and you can find something that behaves like an index fund (so it is theoretically comparable to above). 1% from you, 1% from employer. Your contributions are $500, load fees are $50, your balance is $950. 90% instant return, and possible 5-6% real long term returns going forward (assuming the 6-7% real returns of equities are reduced by the 1% management fee). (You didn't list out the fees, and they're probably different for the different fund choices, so fill in your own details and do the math.)

4. Invest outside the SIMPLE in the same ETFs or equivalent no load index funds; let's assume you can do this with no fees. You put in the same 1% of your gross (ignoring any difference that might come from paying FICA) into a self directed traditional IRA. At the end of the year the balance is $500.

So deciding whether or not to take the match is a no brainer: take it.

Deciding whether you should hold cash, ETFs, or (one of two types of) funds in your SIMPLE is a little trickier.

• If you're comfortable with the risks of investing, you think that the larger returns will make up for the fees, and you expect to be employed there for a longer time period, then going with ETFs might make sense.
• Same caveats, also: if you can find an eligible index fund, the higher starting point might make it better to be in load index funds than ETFs. (Over a long enough time period the higher management fees may exceed the higher one-time ETF fees, so it depends a bit on how long you expect to be employed there.) It's harder to give advice about actively managed funds.
• If you think you are going to make a job change in the next year or so, then investments may not have time to make up for the fees. In this case it might make the most sense to let it sit in cash until you change jobs and can roll over the SIMPLE into a self directed account.
• If you are not immediately 100% vested in the employer match and you think you are going to make a near term job change, you may not want to put anything into the SIMPLE, since you won't get to take the matching funds with you and the fees will eat your money with little benefit to you.
• It doesn't have to be all or nothing. You can leave some of it in cash and invest some.