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Author: DrBear One star, 50 posts Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: of 75383  
Subject: Re: How do I treat 401K employer matching funds? Date: 4/8/1998 4:09 PM
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TchrP wrote,
<<Treat your employer's 401(k) contributions as part of your total compensation. In evaluating the portfolio, therefore, you include them with your own contributions (unless you're from Beardstown, I guess).
In other words, getting an employer's match is not an investment return; it's a tax-deferred
bonus.>>

TMF Pixy replied:
<<No, no, no, no! While it may be tax-deferred, it's definitely NOT a bonus. It's a return on your
money for that investment.>>

Piz asked:
<<No, no, no, no! While it may be tax-deferred, it's definitely NOT a bonus. It's a return on your
money for that investment.>>

And DrBear now adds:

Everybody is right! No seriously, it depends on WHAT you are trying to analyze:

If you are trying to determine whether you should fund your 401(k) or some other retirement vehicle (IRA, etc.) then include your employer's match money, because that is part of your total return. Any analysis which seeks to look at total return inside vs. outside your 401(k) should include the match.

A quick (extremely simple) example:
Contribute to 401(k) or IRA for 1998? Assume contributions (and matches) are made on 1/1/98

IRA:
-$2K contribution (max)
-15% expected return
Beg Value: $2000
End Value: $2300
Total Return: 15%

401(k):
-$6K expected contribution
-10% expected return
-employer matches 50%
Beg Value: $6000
End Value: $9900
Total Return: 65%

Obviously, the 401(k) looks better, even though the instrument your funds were invested in had a lower return. That 50% match puts you way ahead of the IRA.

On the other hand, if you are simply trying to determine the return of the funds you're putting your 401(k) money into, then it doesn't matter whether or not you include the employer funds, because these would be included regardless of the instrument(s) you plop your 401(k) contributions into.
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