Tell them the truth.
Assuming you like the company and position, but the compensation is not sufficient to get you to take the offer, then they should know that. If they can match what you want, they will. Otherwise, you can part ways. No harm done.
There are ways you can position a response. “I'm very interested in the company and feel this role would be a great fit to meet my professional goals, however…”
– “… I have received a more competitive offer by X% increase in base salary.”
– “… I have received a more competitive offer with similar base and x% higher 401k match”
… and so on.
No harm done in saying they are not offering enough, but just don't be a d*ck about it when you suggest that more of certain benefits or compensating pay for lack of those benefits will bring you there.
If you don't see a situation at all where you want to join at all… then just say something like “I appreciate the offer, but after considering the opportunity I feel that my interests lie elsewhere.”
Congrats on the offer! Hopefully they counter.
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