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How IBM’s Recent Decision Can Impact Your 401k Plan

How IBM’s Recent Decision Can Impact Your 401k Plan

This month IBM made headlines when it changed the way it contributes to employee 401k plans. If you haven’t heard, IBM will no longer match 401k contributions each pay-period, but will instead make the match once a year on December 15th.. In addition, if an employee leaves or loses their job before December 15th, they will also lose their match for that year. This may not seem like a significant move, but in fact it is. The two biggest drawbacks to IBM’s 401k plan participants are that they lose out on dollar cost averaging and if they leave (or lose) their jobs before December 15th, they lose their match for that year.

Dollar Cost Averaging:

Dollar cost averaging is the idea that if you invest a fixed amount regularly versus a lump sum at a given time, your average cost for your purchases should be lower. Assume you contribute $500/month in your 401k; that $500 is immediately invested according to how you decide to allocate your money. In months when the market is higher, you will pay more for your investments, but in times when the market is lower, you will pay less. If instead, you invested your money on December 15 of each year, there is a risk that the market could be up sharply that day and you would pay more for your shares. In addition, if astute investors knew the exact day or month in a year when large sums would be invested, it would create arbitrage opportunities and further distort prices.

Who Cares What IBM Does

Some might ask who cares what IBM does, I don’t work for them. That may be true, but IBM is a major corporation with thousands of employees, their decision to change their 401k contribution methodology to save costs can have reverberating affects on other large corporations seeking to save money. If you are a 401k participant and are fortunate enough to have your employer give you matching contributions, you probably notice each paycheck shows your contribution and your company’s matching contribution. If your employer decides to adopt the IBM model, you too will lose out on the ability to average out your monthly contributions. And if you lose your job before your company’s annual match date, you could lose out on that money as well.

Have a question or need advice on how to manage your retirement accounts? Contact ACap Asset Management at info@acapam.com or 818-272-8511.

Ara Oghoorian, CFA, CFP® is the president and founder of ACap Asset Management, Inc., a “Fee-Only” investment management firm located in Los Angeles, CA specializing in helping doctors and physicians make sound financial decisions. Visit us at www.acapam.com