The ExxonMobil benefit structure is unique.
If you’ve worked at ExxonMobil for the past few decades, you have seen your company put in significantly more money than the average American. This is a good thing, to be clear.
But it also poses some challenges and opportunities in your financial life–specifically with your future taxes. In this post, let’s talk about the ExxonMobil Savings Plan 401k in particular.
The ExxonMobil Savings Plan 401k is largely a very good retirement plan. If we compare it to an average 401k, there are some things to love.
Extremely low-cost funds
Precise record-keeping of XOM shares
The ability for mega backdoor Roth contributions
On the other hand, there are also some things I don’t love.
Let’s get the obvious out of the way: No match!
Limited fund options
The plan is missing major asset classes
Let’s talk further about each point, starting with the negatives:
No Employer Match
Hopefully, the match returns soon. But until then, what should you do? The general question seems to be, “Why should I keep using the 401k at all without a match?”
I want to boil this down to a straightforward message. Whether or not you should save in a match-less 401k can be addressed by this question(s):
Will your wealth and financial freedom likely come from a high-income W2 job? Or, are you going to start your own business?
It’s that simple. Let me explain.
If you are certain that you will quit your job at ExxonMobil (or another major O&G company) to start your own business in the next few years, you probably shouldn’t utilize the ExxonMobil Savings Plan 401k. Why would you want to put your money in a retirement plan if you’re going to use it to start a business in two years? There’s no reason to fund your 401k and have to follow withdraw rules that could penalize 10% of your distributions if you’re not 55/59.5. If this is you, the rest of this section won’t apply.
Let me pause here and point out that the vast majority of ExxonMobil employees are not planning on quitting their job in the near term to start their own business. If this is you, the ExxonMobil Savings Plan 401k is still a great place to save.
So, I am effectively saying that the 401k is still the best place for you to save despite the match going away.
A recent article* got a lot of publicity for saying the opposite of what I just said. Let’s list some common objections to my stance and address them.
Objection: Not liquid. Why would you want to lock your money up until 59.5? Well, not only do I disagree with this objection, I think it’s a benefit of 401k’s. Having a strong reason not to touch your investments for decades is a superpower. Your behavior as an investor has a tremendous impact on your returns. It’s tempting and harmful to look at investments weekly and make unnecessary changes. The 55/59.5 rule on 401k distributions pushes you to think in decades–this can help you in a big way.
Objection: Not that big of a tax benefit. This is just wrong. There are a few research papers that have tackled this question. Let’s start with a Roth 401k. The general consensus is that tax-free growth is worth somewhere around 1-2% per year in extra returns. 1-2% is a big deal when you extrapolate it out a decade. It’s an astronomical number when you play it out for a few decades. For pre-tax, it is a very big benefit for ExxonMobil and other large O&G companies. Your income and benefits mean you will likely be able to retire earlier than most. This gives you plenty of time to find your equilibrium tax rate in retirement.
Simply put, unless you are planning on starting a business or buying A LOT of direct real estate (which I would call, “starting a business”), the 401k is still worth heavily funding for most of you.
With that being said, losing the match is a big negative. Hopefully, it makes a quick return.
Limited Fund Options
The ExxonMobil plan has a surprisingly small number of fund options. To be clear, more funds is not always better. Large Wall Street firms have commonly used 30+ funds to build client portfolios–and it’s not because that’s in the client’s best interests. Still, there can be some value in having more funds.
The stock market in its simplest form can be divided into U.S. stocks and International stocks. Just two sections. We can then break it down into company size: small cap vs. large cap. We can also delineate between international companies located in developed nations vs. emerging markets. We could also split them by value vs. growth. Profitable vs. less-profitable.
My main point here is that the ExxonMobil 401k does not get as granular as I’d like it to. This leads to my next point.
Missing Major Asset Classes
The ExxonMobil 401k does not have an emerging markets fund. It’s one thing to have a small lineup of funds. Technically, you can build a great portfolio with just a few funds. But, not having access to an entire market of companies is a downside.
Emerging markets is also one of the highest-potential areas in the market right now. It hasn’t done well over the past decade. Current valuations are very attractive. You should include it in your portfolio, but the 401k plan does not have a way for you to do so.
How do we compensate for this? For ExxonMobil clients we serve, we have to be mindful to include emerging markets outside of the 401k plan. In other words, we start by building a master portfolio. It’s common for someone to have a 401k, Roth IRA, and a brokerage account. We can build your master portfolio differently in each account for the greatest tax benefit. With ExxonMobil clients, we just place emerging market exposure in a different account outside of their 401k.
Let’s move on to the very attractive benefits of the ExxonMobil 401k.
The index funds built by Northern Trust are an excellent way to get stock exposure at a very low price.
Remember, you often do not get what you pay for when you invest in the stock market. As Jack Bogle said, you instead get what you don’t pay for.
Several mutual funds closely resemble the index funds in the ExxonMobil 401k. These funds have almost the same exposure, a similar weighting to each company, but there’s one stark difference. Cost. It’s common for large investment firms to manage mutual funds that charge .5%-1% per year. Many of these funds barely deviate from the index funds available in the 401k. In these cases, it’s no surprise that they often underperform the market–they’re offering a very similar investment but charging more for it. It’s almost an arrangement for you to pay the investment company some of your earnings without receiving any value in return.
There are LOTS of lousy 401k plans in America filled with expensive funds. It’s a huge benefit that the ExxonMobil plan is not one of them.
Precise Record-Keeping of XOM Shares
The ExxonMobil 401k keeps track of the share price you purchased XOM at throughout your career. This is a terrific feature that becomes very helpful when you elect an NUA distribution in retirement.
Of the 401k plans in America that offer NUA distributions, the vast majority do not track your cost basis in this way. It’s far more common to have an estimated cost basis for your entire bucket of stocks and you get to decide what to do with it (example: instead of having $1M in company stock at 50 different share prices, you have $1M in company stock with a $600,000 cost basis–every share has the same basis).
It’s far more difficult for a record keeper to do what ExxonMobil has done. And it’s a great benefit. Pinpointing the exact share prices you’re interested in electing NUA on allows for a higher level of tax planning.
Mega Backdoor Roth Contributions
The ExxonMobil plan allows for mega backdoor Roth contributions. Let me define this term briefly:
You’re allowed to put $19,500 (and $6,500 over age 50) in your 401k each year. This elective deferral can be either pre-tax or Roth. However, you are allowed to continue putting more money in your 401k as an after-tax contribution.
ExxonMobil then allows you to make a conversion each year. This means you take your after-tax contributions and you put them in a Roth 401k.
So, you could contribute $19,500 to lower your taxable income. If you’re then looking for an additional place to save and invest, the after-tax/backdoor Roth is a great option.
On the one hand, you may have to ask yourself if you’re comfortable putting $57,000 (that’s the full 401k annual limit–+$6,500 over age 50) in a retirement plan. If you have something you need the money for before retirement, you may not want to do this.
But if you’re simply trying to reach financial independence as quickly as possible and in the most tax-efficient way, this is a great option. If you’re already living in the house you want to live in, and you’re not trying to buy a second home, why would you not choose tax-free growth? Many companies do not offer this, the ExxonMobil 401k does.
As you can tell, every situation is unique. For some people, our advice is to contribute none. For others, it’s to contribute $19,500. And for others, it’s to max out the $19,500 AND contribute another $35,000 after-tax.
If you’d like to learn more about the ExxonMobil Savings Plan 401k and how Net Realized Appreciation, you can read our post on the topic here.
For insight on your 401k and how it works alongside the rest of your financial life, you can schedule a short intro call here.
*Quick note on this article. I generally like the author’s work, but the assumptions in the article are very off-base.