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PhuzzPhool wrote:
<<gmaxwell is correct, grab all the employer matching money in your 401(k), it's FREE! For more enlightenment about retirement the Retirement Investing Board here at TMF is invaluable. Listen to TMF...Pixy over there, he knows whereof he speaks.>>

Hm, that raises a question (and yes, I'll take it over to the Retirement board as well): How do you figure in employer matching funds when calculating returns? If my employer matches, say, 25% in my 401K, am I earning an immediate 25% on my money, or am I ... what?

Thanks,
Piz
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>> How do you figure in employer matching funds when calculating returns? If my employer matches, say, 25% in my 401K, am I earning an immediate 25% on my money, or am I ... what?
-----------------------------
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.
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Piz,

You're earning an immediate 25% on your money. If your employer says the company will match 25% of your contribution up to 6% of your pay and if you put in that 6%, then you'll immediately receive 25 cents on the dollar, or another 1.5% of your pay. If you don't contribute, you get nothing. Therefore, that additional contribution must be counted as part of your return for the year.

Regards…..Pixy

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TchrP,

<<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.>>

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. If you don't contribute (invest), you don't get it - ever. If you do contribute (invest), you get it immediately. That's a return, and an immediate one at that, on that investment. One could argue that it's really part of your compensation because your taxable pay was curtailed by the employer so the company could pay the match. Perhaps that's so in a very technical sense. But if you don't contribute, that "compensation" is lost forever. Accordingly, it's a form of an opportunity cost that must be accounted for as a return on the actual investment or as a loss if the investment is foregone.

Regards…..Pixy
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TMFPixy wrote:
<<TchrP,

<<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.>>

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. If you don't contribute (invest), you don't get it - ever. If you do contribute (invest), you get it immediately. That's a return, and an immediate one at that, on that investment. One could argue that it's really part of your compensation because your taxable pay was curtailed by the employer so the company could pay the match. Perhaps that's so in a very technical sense. But if you don't contribute, that "compensation" is lost forever. Accordingly, it's a form of an opportunity cost that must be accounted for as a return on the actual investment or as a loss if the investment is foregone.>>

I can see your point, except for the part about treating it "as a loss if the investment is forgone." I could just as well treat not buying Microsoft in 1986 as a loss, right? If that's the case, then I've lost literally TRILLIONS of dollars over the years by not investing in, well, every instrument on the planet. I guess I'm not as savvy as I thought I was. (Although it makes me a MAJOR player, eh? The SEC should be calling any minute now...)

But that's not why I'm writing (heh). If you count the company match as a return, how do you calculate that return? If I put in $1000, meaning that the company adds $250, then compound that 25%/day (that's a 9000% annual rate), after 360 days my $1000 is worth $77,197,757,162,694,800,000,000,000,000,000,000,000.00.

Uh, I'll take it.

OK, I know that number is meaningless, but how *should* I account for that return so I can properly evaluate my strategy? Am I earning a straight 25%? Hell, I'll take that, too. I don't think that's right, either, though.

Thanks,
Piz

P.S. How do you refer to a number with that many places to the left of the decimal, without resorting to scientific notation? "77.2 gazillion dollars," right? I'm guessing...
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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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TchrP wrote:
<<... (unless you're from Beardstown...) ...getting an employer's match is not an investment return...>>

TMF Pixy replied:
<<No, no, no, no! ...It's a return on your money for that investment.>>

DrBear added:
<<Everybody is right! ...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.... 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...>>

What is this, the Simpson jury? OK then, juror #4 side with TchrP (and I wish I had been the first to add the clever Beardstown analogy). As Dr. Bear points out, if you are comparing the 401k with an outside investment, then including the match becomes very important.

Of course, it should also be noted that this can only be done with 20/20 hindsight. You can't know until after the event what the outcome will be and you can't reverse time to change a decision. For example, a 401k with bad investment options and an employer's match may fall short of some brilliant stock picking done through an IRA. However, the *sure, safe, sane* bet is to always take the 401k match first.

But within a 401k comparison, never add the match to your return. When you want to know how you're doing, you must find a benchmark for comparison. This benchmark (usually a market index) won't have an employer's match added in, so why should your numbers?

It wouldn't be comforting to me to know that the only reason I'm even with the market is because of my matching funds. I want to know what the underlying investment is actually doing, not how the final, heavily massaged numbers make it appear to be doing. Although the matching money is yours in the end and the alternative investments may be less than pleasing (or non-existant), I still want to crunch my numbers to expose the base return. Companies that try juggling numbers to "show" more profit get their heads handed to them. The verdict is final.
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DrBear wrote:
<<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%
>>

Note that the employer match is a one off, while the excess return on the IRA compounds yearly.

Over 5 years the 401(k) money doubles. [1.25* (1.10) ^ 5 = 2.01] This an annual return of 15%. Under these assumptions the 401(k) is the better investment only if you intend to withdraw the money within 5 years.

Traditional pension plans favor those who work at the same company for 40 years. 401(k)s favor those who change employers frequently, rolling the 401(k) into higher performing IRA investments when they change jobs.
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Oops! I used a 25% match instead of 50% DrBear
used, changes the numbers but not the point.

I should have said:
Over 9 years the 401(k) money increases by 3.5. [1.25* (1.10) ^ 9 = 3.5] This an annual return of 15%. Under these assumptions the 401(k) is the better investment only if you intend to withdraw the money within 9 years.
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Only if you move to Beardstown. If you calculate the return in a 401(k) account as if the employer's contributions were part of the return, it's almost exactly the same as the Beardstown ladies' counting their periodic additions to the portfolio as part of the return.

Seriously: Dr. Bear has it right. It depends on what purpose you're calculating the return for. If it's a question of whether or how much to invest in your 401(k), then it's necessary to consider any employer match that your contributions will trigger.

But if you're considering whether to roll a 401(k) over into an IRA, the employer's contributions should be counted as part of the original investment; otherwise the return is wildly overstated.

And if you're deciding whether to contribute more to the 401(k) or whether to divert part of it to an IRA, you're forced to guess whether the potentially higher return on the actual cash invested warrants foregoing some of the employer's contribution.

There are weirder possibilities. As the owner of a few shares of EK, I have the option to buy certain Kodak products at a discount. If I exercise the option, am I going to treat the discount as investment return?
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Well, with tongue in cheek, I will add " I think that the real answer has to do with what you are trying to prove."

If you want to go to a cocktail party and impress people with your investment expertese, and your investments have earned 30%, by all means add the 25% matching and tell people that you earned 55% on your investment.

If you want to see if you made your ROE goal, treat the matching as part of your funds invested.

If you want to make projections as to what your funds will be worth in x years...

Sometimes it is necessary to read between the lines.

TTFN...TiggerToo
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This is too good to pass up. Haven't had this much fun since Trust-R-us on the Inheritance Board.

Well, with tongue in cheek, I will add " I think that the real answer has to do with what you are trying to prove."

If you want to go to a cocktail party and impress people with your investment expertese, and your investments have earned 30%, by all means add the 25% matching and tell people that you earned 55% on your investment.

If you want to see if you made your ROE goal, treat the matching as part of your funds invested.

If you want to make projections as to what your funds will be worth in x years...

Sometimes it is necessary to read between the lines.

TTFN...TiggerToo
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After scanning the thread from the beginning I feel it's time to notify the Academy of Message Boards Arts & Sciences (AMBAS?) that the situation has arisen where all respondents (even with diametrically opposed positions) have been correct. Furthermore, this amazing feat was done without mud-slinging, name-calling, gender-questioning, ethnic-bashing, @#$%^ing, *^&%^$#@ing, and/or @^&(#@%&#$)()*^ing! Stop the presses, History has been made on the RetInv board! All respondents please come to the podium to accept your award.
The highly coveted AMBAStard! Congratulations,
PhuzzPhool
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The highly coveted AMBAStard! Congratulations,>>>>>

f**k-an-A, fellow Fool. Nice to have forum to exchange ideas, or even argue, without the hyper ventilating of idiologues(the bear Folder excluded, of course). It's also great to check out investment ideas without the knowledge that some one will feed his family with your money if only you can be convinced to part with some.
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TchrP wrote:
<<Dr. Bear has it right. It depends on what purpose you're calculating the return for. If it's a question of whether or how much to invest in your 401(k), then it's necessary to consider any employer match that your contributions will trigger.

But if you're considering whether to roll a 401(k) over into an IRA, the employer's contributions should be counted as part of the original investment; otherwise the return is wildly overstated.>>

That's what I was after with the original question. There are really two answers, depending on the reason for the comparison.

Thanks everyone, and I hope we all wind up with $77,197,757,162,694,800,000,000,000,000,000,000,000.00 within the next year. :-)

Piz
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Wow! My computer monitor blows up and look what happens while I'm away. The posts on this issue (how to account for an employer match within a 401k) really flew. Fortunately for me, all the bases were touched so I don't have to add anything. I do, though have to respond to Piz's query in which he asked:

<< How do you refer to a number with that many places to the left of the decimal, without resorting to scientific notation? "77.2 gazillion dollars," right? I'm guessing...>>

I much prefer to use the more mathematically precise terms of "scads" or "a bunch" myself.

Regards…..Pixy

P.S. For those interested in my computer's health, the monitor still ails. The screen fonts start out tiny on the left, scale up to HUGE in the middle, and then fall to tiny on the right. It's kinda like reading text on a rotating globe. Therefore, I'm passing this beast on to the kids and getting myself a brand new Gateway G6-333XL with all the bells and whistles. I've gotta wait two weeks, though, for delivery. Therefore, if my posts seem somewhat strange in the interim, it's due to the difficulty I have in seeing what I wrote. (Hey…..That works for me as an excuse!)
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$77,197,757,162,694,800,000,000,000,000,000,000,000.00

= $77,197. decillion

There is a name that would make it $77. "xxx"illion,
but I don't know what it is.
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<< $77,197,757,162,694,800,000,000,000,000,000,000,000.00

= $77,197. decillion

There is a name that would make it $77. "xxx"illion,
but I don't know what it is. >>

As long as we're talking big numbers, the largest number with a name is a 1 followed by 100 zeros. That equals a google.

Cameron
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<<As long as we're talking big numbers, the largest number with a name is a 1 followed by 100 zeros.
That equals a google.>>

No, the largest named number is a googolplex. This is the number ten raised to the googol power. It is the number one followed by 10^100 zeros.

Regards, Jim

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>If you want to go to a cocktail party and impress >people with your investment expertese, and your
> investments have earned 30%, by all means add the 25% >matching and tell people that you earned
> 55% on your investment.

55%? Not impressive enough! You are forgetting about compounding. The gain you can claim in this case is 62.5%
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<As long as we're talking big numbers, the largest number with a name is a 1 followed by 100 zeros. That equals a google.>

Not quite: a 1 followed by a googol of zeros is a googolplex (really). The name googol was invented by Dr. Edward Kasner's 9-year old nephew when asked to think up the name for a very large number, 1 with 100 zeros after it.
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>As long as we're talking big numbers, the largest >number with a name is a 1 followed by 100 zeros.
> That equals a google.

I've run into a googleplex: 10^1 google
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<>If you want to go to a cocktail party and impress >people with your investment expertese, and your
> investments have earned 30%, by all means add the 25% >matching and tell people that you earned
> 55% on your investment.

55%? Not impressive enough! You are forgetting about compounding. The gain you can claim in this case is 62.5%>

Bunch of ignorant braggers! To do it right! Figure out your annualized rate of return the day after the employer contribution. You should get much better results that way. ;-)
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JeanDavid wrote:
<<Bunch of ignorant braggers! To do it right! Figure out your annualized rate of return the day after the employer contribution. You should get much better results that way. ;-)>>

That's what I did way back in this thread. Just multiply the match percentage by 360. A 25% match is 9000% annualized. After one year, $1000 compounded daily at that rate is $77,197,757,162,694,800,000,000,000,000,000,000,000.00. Like I said then, I'll take it. ;-)

Piz
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