WhitmanTrading

401k

A 401k is a workplace retirement plan funded by payroll deductions, often with an employer match on what you contribute. The match is compensation available nowhere else, and the plan's fund menu — which you did not choose — decides how much of the balance survives thirty years of fees.

Two things make a workplace plan different from every other account: someone else may put money in alongside you, and someone else chose the list of things you are allowed to buy. Both are worth handling deliberately, and most people handle neither.

How it works

A candlestick chart with contributions arriving on a schedule.
Payroll deductions, invested inside a wrapper. Illustrative chart - not real market data.

Contributions come out of pay before it reaches you. In the traditional version they reduce your taxable income for the year and are taxed on withdrawal; in the Roth version they are taxed now and qualified withdrawals are not.

The first half of a price series with a second contribution alongside.
An employer match arrives on top of what you put in. Illustrative chart - not real market data.

Many employers match some fraction of what you contribute, up to a cap expressed as a share of salary. That match has no equivalent in any other account and it is the single strongest reason to prioritise the plan.

A section of the price series constrained to a narrow set.
And the menu of investments was chosen for you. Illustrative chart - not real market data.

You choose from a menu your employer’s plan provider assembled. It might contain a very cheap index fund and it might not, and the difference over decades is large.

A worked example

A window of price bars with two contribution rates compared.
The cap is a share of salary, not of your contribution. Illustrative chart - not real market data.

Take a 75,000 salary where the employer adds 50% of what you put in, up to 6% of salary.

Contributing 3% puts in 2,250 and draws 1,125 from the employer.

Contributing 6% puts in 4,500 and draws 2,250.

So at 3% you are leaving 1,125 a year uncollected. Raising the rate costs you 2,250 more and brings in 1,125 more that was already offered. The workings are in the 401k match calculator.

“50% up to 6%” does not mean the employer stops at 6% of your contribution. It means the first 6% of your salary is eligible, and reading it the other way produces a contribution rate far below what captures the offer.

The menu is the part to audit

The second half of a price series with several cost paths.
Two funds, same market, very different fees. Illustrative chart - not real market data.

On this site’s arithmetic, an annual fee of 5 basis points removes 1.5% of a thirty-year pot, 20 removes 5.8%, 75 removes 20.2% and 150 removes 36.5%. The figures are in research/series-measurements.json.

A plan whose default is a 90-basis-point target-date fund is charging roughly a quarter of the result against a 4-basis-point index option sitting three rows below it on the same menu.

Plan administration fees sit on top of the fund fee and are disclosed in the plan documents rather than on the fund page. They are worth finding once.

Auto-enrolment and its default

A candlestick series with a level that is never reached.
A default rate is a starting point, not a recommendation. Illustrative chart - not real market data.

Many plans enrol you automatically at a low rate, commonly around 3%. It is set to be unobjectionable rather than to be correct, and it frequently sits below the match cap.

Which means the plan’s own default can be the thing leaving employer money uncollected. Checking the rate against the cap takes a minute and is worth more than most investment decisions available in the menu.

Vesting and leaving

A long-horizon candlestick view with stepped levels rising.
A credited match is not always a kept match. Illustrative chart - not real market data.

Your own contributions are always yours. The employer’s part may vest on a schedule — all at once at a date, or in steps — and leaving before it completes forfeits the unvested portion.

When you leave, the balance can usually stay, move to a new employer’s plan, or roll into an individual account. The last option typically widens the menu enormously, which is often the single best moment to fix an expensive fund choice.

Costs beyond the fee

A candlestick chart annotated with the round-trip cost of a switch.
Switching funds inside the plan still costs. Illustrative chart - not real market data.

Moving between the menu’s funds is still a transaction. On this site’s shared series a round trip measures about 2% of the median bar range of 0.493 — small, but not a reason to react to quarterly performance.

Price bars with entries planned in advance across a stretch.
And the plan's contribution schedule is fixed by payroll. Illustrative chart - not real market data.

Some plans match per pay period rather than annually, so front-loading contributions into the first half of the year can miss later matches entirely unless the plan has a true-up provision.

The original data

Of the 24,971 unique videos in research/search-study-corpus.jsonl, 22 have a title about workplace retirement plans, at a median of 81,626 views across 20 channels — and 23% use beginner-shaped language. Roth accounts appear in 24 at 95,293 and the match specifically in 15 at 54,763. The counts come from site/rank_investing.py.

A candlestick series with several gaps, the largest of them marked.
A year not contributed cannot be returned to. Illustrative chart - not real market data.

Twenty-two videos on the account and fifteen on the match inside it. The match is nearly a subject of its own by search volume, which is a fair reflection of it being the only part of the arrangement where someone else is contractually on the other side.

A stretch of price bars cut short at a decision point.
Money is tight this year. Skip it and catch up later? Illustrative chart - not real market data.

The answer to the question on that chart is that the match cannot be caught up. Contribution limits are annual and the match is calculated on what you put in during that year, so a skipped year is an offer that expired rather than one that carries forward. Catching up later replaces your own money and never replaces theirs.

When it fails

The plan’s own defaults are where most of the damage is done, and none of it looks like a mistake. Auto-enrolment at a rate below the match cap, invested in the most expensive fund on the menu, produces an account that grows every year and still ends up substantially smaller than it should have been. Nothing goes wrong, no statement flags anything, and the two decisions that would have fixed it — raise the rate to the cap, move to the cheapest broad fund — are both available on the same afternoon.

The second failure is misreading the match formula. The cap is a share of salary.

A third is ignoring vesting when changing jobs. An unvested match goes back.

A fourth is leaving old plans scattered. Each keeps its own menu and its own fees.

A fifth is treating the fund menu as fixed. It is chosen by the employer and can be questioned.

And a sixth is cashing out on leaving. That converts a sheltered balance into a taxable event and usually a penalty.

Roth IRA is the individual account with more menu freedom. Index funds is usually the cheapest thing on any plan’s menu. And expense ratio is the number to audit the menu against.

What I actually do

The audit worth doing once is the fund menu, not the contribution rate. Everyone eventually raises the percentage; almost nobody opens the plan document to find the cheapest index option in it, and on a thirty-year horizon that single afternoon is worth more than several years of increased contributions.

— Michael Whitman

This page is educational, not financial advice. Test every idea on your own charts before risking money.