401(k) Match or Cash?

Is a Raise Better Than Employer 401(k) Matching?

401(k) Match or Cash?
May 16, 2016

Most sites dispensing financial advice (MoneyTips included) suggest that you contribute as much as possible to your 401(k) whenever company-matching funds are included. Otherwise, you are essentially turning down free money from your employer.

However, it becomes a more interesting question if you have an option between a higher salary and a lower salary with a matching 401(k) – in other words, would you be better off to take the cash equivalent of a 401(k) match and invest it separately?

The results of a recent Fidelity survey imply that the answer is no. Respondents overwhelmingly voted for employer contributions as a preference. 85% of respondents preferred an employer-contribution structure to their retirement plan, with 43% willing to accept a lower salary to have an employer contribution.

Is this really a good idea, or is cash preferable? The answer depends on your situation. Let’s look at some specific aspects.


  • Liquidity – This is one of the strongest arguments for cash. If you are struggling with debt (especially high credit card debt), your money would be put to better use immediately paying down those debts instead of being inaccessible in a 401(k). Cash also allows you a greater cushion for emergencies such as non-covered medical expenses. Granted, you may be able to borrow against your 401(k), but depending on how you got into debt in the first place, that may not be the smartest approach – which leads us to…

  • Spending Habits – The 401(k) employer contribution provides excellent incentive to save for retirement and spend less on discretionary items. Choosing cash over a 401(k) is a poor choice if you do not have the discipline to save/invest/spend it wisely.

  • Taxes – By taking cash, you pay taxes upfront and lose the 401(k) tax-deferred status. The lower your tax bracket is, the less this matters – but there is an inherent assumption that your tax bracket will be lower in retirement when you start to draw out 401(k) contributions.

  • Employer Philosophy – Some employers use matching contributions as a buffer of sorts, scaling it back in hard times and restoring it in good ones. Scaling back a salary is harder to do and produces greater unrest. Arguably, cash may be steadier income – unless the company is forced to do layoffs or firings in difficult times from that lack of flexibility. You will have to assess an employer’s history of layoffs/firings to determine properly the risk.

  • Investing Skills – According to Christine Benz, the Director of Personal Finance at Morningstar, a 6% annual return on investment is a reasonable, yet conservative, expectation for a 401(k) plan. Can you beat that investing on your own? You may have in recent years, although your 401(k) has probably done better than that as well.

In summary, cash may be a better option for you assuming you have the discipline and skills to use it well and still provide for your retirement – but for many Americans, maximizing the 401(k) contribution is probably the better choice.

As the great philosopher Dirty Harry (aka Clint Eastwood) said, “A man’s got to know his limitations.” Our advice: don’t argue with Dirty Harry.

The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. Investing involves risk including loss of principal. Past performance is no guarantee of future results.

Winnie Sun is a registered representative with, and securities offered through LPL Financial, member FINRA/SIPC. Investment advice offered through Sun Group Wealth Partners, a registered investment advisor and a separate entity from LPL Financial.

Let the free MoneyTips Retirement Planner help you calculate when you can retire without jeopardizing your lifestyle.

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