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Your Employer’s 401(k): To Enroll or not to Enroll?

Written by Donna Parshall on 2014-02-07

Does your employer offer a 401(k)? The popular employer-sponsored plans can be a great way to save for retirement. But there may also be good reasons not to enroll, depending on your circumstances. To help determine whether you should be participating right now, ask yourself these questions:

Does my Plan Offer a Company Match?

One popular argument in favor of 401(k) participation is that you could be walking away from “free money” if you don’t participate. The “free money” part has to do with plans that include a company match on employee contributions.

Let’s say Seth earns a base salary of $50,000 per year. His employer’s 401(k) plan allows for a 50% company match on every dollar Seth contributes, up to 5% of his base salary. If Seth chooses to contribute 5% — or $2,500 over a year’s time – his employer will kick in $1,250 (a 50% match on Seth’s contributions) during that same period.

Company matches are designed to encourage 401(k) participation and help employees save for retirement. The percentage matched varies by plan, and some plans don’t offer a company match at all. If your employer’s plan doesn’t offer a company match on at least a portion of your contributions, it may be worthwhile to consider other options – such as a traditional or Roth IRA.

Can I Afford to Let my Funds Stay Put?

A 401(k) comes with built-in features that encourage you to save for your golden years. Those features include tax-sheltering benefits when you let your money stay put for the long haul, as well as tax penalties – hefty ones – for withdrawing funds before you reach retirement age.

Before you enroll, make sure you have an emergency fund (at least six months’ worth of living expenses). Also try to make sure there’s room in your budget to save for other needs that could arise before retirement – like a home down-payment or school tuition. If you have to dip into your 401(k) early, you’ll pay a 10% early withdrawal penalty tax, plus income taxes, on the funds you withdraw.

Do I Have a Lot of Outstanding Debt?

Making 401(k) contributions while you’re paying interest on a large amount of debt can be counterproductive, unless your employer’s plan offers a really generous company match. You may want to concentrate on paying down the debt first. When in doubt, consult a financial advisor.

Companies set up 401(k) plans to meet their own objectives – so it’s important to understand how your employer’s plan works before you decide to enroll or not. In addition to the plan’s matching feature (if any) and your own personal finances, you’ll want to consider other factors – such as the investment fund options offered by the plan.

Some plans also offer a loan feature that lets participants borrow money from their accounts and pay it back – which can remove the sting of getting taxed for early withdrawal. If you do decide to pass on enrolling now, you can always choose to enroll later. Your finances may change or your company may decide to sweeten its current plan offerings.


Goldstein, Cliff. “5 Reasons not to Contribute to Your 401(k).” MarketWatch. Web. 5 Aug. 2013.
Harder, Jeff. “5 Things You Should Do Before Opening a 401(k).” How Stuff Works. Web. n.d.