You have been hired by Boeing to figure out a mystery that has been bugging them. When they looked at their company-wide 401K balances at the end of the year, they had almost $100 million less than they had expected. Theft, embezzlement, hackers, no, no and no, something even more insidious. So what was the cause of the shortfall? Read on to find out.
First let’s start with the basics. Boeing has a 401k plan, known as a defined contribution plan available to their employees to help them invest for retirement. Boeing offers a match which is about as close to “free money” as we will ever see in our lifetime. For every $1 an employee puts in the plan, Boeing will put in $0.75…yes, you read that correctly, each dollar a Boeing employee puts in earns 75% BEFORE it has even been invested. Of course, there are maximums, which in this case is 8% of an employee’s salary.
Let’s run through the numbers again: A Boeing employee earning $60,000 or $5,000/month who contributes 8% or $400/month into the 401k will receive a $300/month match from Boeing (equal to 75% of their $400/month contribution). As Paul Merriman put it in his column, that is like getting a 6% raise. Remember though that in order to earn that “raise,” the Boeing employee must make that contribution equal to 8% of their salary. Simple enough, saving 8% of your salary shouldn’t be that onerous especially if someone told you that they would give you $0.75 for every dollar you saved. Right?
Wrong. Someone forgot to tell about 56,000 Boeing employees that they should max out their 401K contributions to get the company match.
The question: How much did money did Boeing employees “give up” by not maxing out their 401K plan?
Here is what we know:
- 8,400 employees didn’t participate at all in the 401K plan. Their contributions: ZERO.
- 48,000 didn’t contribute enough to get the maximum match. Assume that they contributed on average about $243/month.
- Assume that the average Boeing employee makes $60,000 per year.
For the 8,400 employees who didn’t participate.
- They could have earned $3,600/year from the company match. $60,000 (average salary) * 8% (max. contribution for match) * 75% (Boeing match) = $3,600
- $3,600 * 8,400 employees = $30.2 million
For the 48,000 who didn’t max out their contribution and on average contributed $243/month.
- Assume a company match of 75% X $243/month = $182/month company match
- Maximum company match = $300 (see example above) – $182 = $118/month left “on the table”
- $118/month * 12 months/year * 48,000 employees = $68.0 million
Total amount missing due to lack of participation from employees: $30.2 million + $68.0 million = $98.2 million
This should be a good lesson for students to take advantage of that “free money” of a company match in a 401K plan.
Extension: Have students research the reasons why employees don’t invest in their company 401-K plan.