Evaluating and Negotiating Job Offers
Part 4 – 401K

(This is part 4 of the series on Evaluating and Negotiating Job Offers. You may also find these other parts of interest: Part1: Base Salary, Part2: Signing Bonus & Relocation Benefits, Part3: Stock Options, Part5: ESPP, Part6: Other Perks).

The next aspect we look at the 401K

What is a 401K?
A 401K is an employer sponsored retirement plan. Instead, of offering pension plans, most companies these days offer 401K retirement plans. The way this works is, you set aside a certain portion of the pay check, before taxes to pay for your own retirement. In order to encourage employees to set aside this money, employers offer a “match”. For example, if your company offers you a 3% match, then it means that if you set aside 3% of your pay for your retirement, the employer will put an additional amount equal to 3% of your pay into your retirement account. Suppose, your salary is $50K. Then, this means, if you contribute $1500 towards your 401K, then the employer will add $1500 to your 401K account. That is free money in addition to your salary! That’s why it’s important to pay attention to the company match towards your 401K while evaluating an offer.

Some additional information about 401K:

  • It is an employer-sponsored plan. That means that the employer is responsible for creating and designing the plan.

  • It is offers tax-deferral benefits. That means instead of paying taxes on the amount you contribute to 401K now, you will pay the taxes on it when you withdraw (in retirement). In the example above, for a person with salary of $50K contributing $1500 to 401K, the taxable income will be reduced to $48,500. And the amount you would have paid in taxes will gain compound interest over the years until you retire. (More about benefits of compound interest here.)

  • The employer provides diverse options for you to invest the money in your 401K in the form of different mutual funds, bonds, company stocks etc.

  • There is an annual limit of how much you can contribute to 401K. For the year 2007 it is $15,500. People over 50 years of age are allowed an additional "catch up" contribution of $5000 for the year 2007.

  • Withdrawals from the 401K are allowed only after a person reaches age 59½. If the money is withdrawn earlier it is subjected to a withdrawal penalty of 10%, in addition to the taxes that need to be paid on the amount withdrawn. There are some exceptions to this, such as purchase of primary residence, medical expenses, funeral expenses etc.

  • When you change jobs, you can roll over your 401K to your new employer.

More detailed information about 401k can be found on this Wikipedia Page.

Setting your expectations:
The percentage of matching by the employer varies from company to company. According to this website,

Seventy-five point five percent (75.5%) of companies match employee contributions. The average company contribution was 4.1% of payroll.

Also, remember that in some companies the matching contributions may not start immediately after you join. Company policies may require you to be an employee for 3 months, 6months or even a year or more before you qualify for company match.

The 401K is decided based on company policy and you will not be able to negotiate a different matching percentage. However, it can (and must) be used while comparing two offers, to determine the value of the whole package.

Please stay tuned for more discussion on other aspects of the compensation package namely ESPP, annual bonus, insurance benefits, paid vacation and other perks.

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