The most generous plans match your contributions each pay period while the least generous plans only provide the employee match once a year. An annual match advantages the employer and disadvantages the employees.
A 6% employer match distributed annually to an employee's 401k can disadvantage them compared to a per-paycheck match because it prevents employees from utilizing dollar-cost averaging, essentially meaning they miss out on the potential benefit of investing smaller amounts of money at different market points throughout the year, potentially reducing their overall investment return; essentially, they are putting a larger sum of money into the market at one time which can be riskier depending on market conditions.
Our match was distributed near market highs for the year, when the S&P 500 was up nearly 25% for the year, meaning you were able to buy less stock with the match. Wells Fargo benefited from the rally, not us. If our Head of Equity Strategy is correct, the same will happen next year because he expects a gain of 19% by the end of 2025.
Additionally, the one-time annual match takes away our ability to profit from the power of compounding interest/gains on the match amount throughout the year. Compounding multiplies your savings at an accelerated rate.
Vanguard did a study back in 2017 and concluded that an annual match vs a pay period match will cost an employee (making $40,000 per year) $50,000 by the time they retire. This study takes certain assumptions in to account and assumes the employee will miss out on several years of matches due to job changes. How much will the annual match cost you if you’re making more than $40K per year? ( I hope you are.)
Finally, let’s not forget that Wells Fargo has been found guilty of violating their Fiduciary responsibilities regarding the 401K plan in several different ways:
- Overpaying for company stock
- Choosing investment options which benefited Wells Fargo at the expense of employees (high fee, low performance)
New lawsuit alleges:
- Wells Fargo mismanaged its 401k plan by using assets forfeited by former workers for it’s own financial benefit instead of plan participants.
Dollar-cost averaging:
By contributing a set amount with each paycheck, an employee can buy more shares when the market is low and fewer when it's high, mitigating risk.
Missing out on dollar-cost averaging can potentially lead to a lower overall return on their retirement savings.