I was visiting with a young family member and they shared their employer’s expectations for employee’s to donate generously to the corporate identified charities. The employer has set up an option through payroll to make those contributions and track involvement.
For families who are not in the stage of paying down debt or establishing a solid emergency fund, workplace giving through a payroll contribution has some advantages. For tax purposes, this method eliminates the need to get documentation about a donation directly from the organization, unless the contribution is more than $250 per month. In some cases, employers provide a matching gift, so an initial donation could amount to even more giving. Additionally, a donation goes further because a payroll contribution reduces administrative costs by being funneled directly to the organization.
While working on changes to some retirement education programs, there were several articles extolling the positive impact when employers institute “automatic enrollment,” which means they withhold a certain percentage of their employees’ pay, put it into the 401(k) with identified investments, and then give the employees the opportunity to opt-out of the plan. The Bureau of Labor reports, of employees covered by a retirement plan at work, 30% fail to participate and estimates are the figure would drop to 15% if automatic enrollment was standard practice.
On both counts I see the value in the steps taken, but when you look more closely you discover some flaws. Financial planning emphasizes customizing steps to the specific risk factors of clients. A young family might be in a position where applying income earned to debt reduction makes more financial sense. A smart alternative for them would be to donate time and energy to local charities. Smaller amounts, lower than what an employer withholds from income that doesn’t compete with immediate needs, placed in wisely selected investments could also generate a realistic retirement nest egg. In the long run, if debt is reduced and emergency funds are built, an employee might be less likely to borrow from the retirement account or liquidate it early. As always, standard financial recommendations and actions might solve an identified lack of action, giving back to the community and contributions to retirement savings, but can create unintended results. It’s okay to exercise your options and personalize how your paycheck is distributed.