Are You Turning Down Free Money?

When you're offered a gift, do you throw it back in the giver's face?

That's what many employees are doing to their employers. According to a new study, one-third of employees don't contribute enough to their 401(k) plan accounts to take full advantage of their employers' matching contributions. By skimping on their retirement savings, these workers are turning down free money.

Making savings a priority
The problem spans age and income lines. As you might expect, low-income and younger workers are less likely to earn the full 401(k) match from their employers. But among those making $50,000 to $75,000, 24% don't max out their match. For incomes above $100,000, 12% don't reach the top threshold. When you consider that many employers match only small amounts -- often around 3%-6% of an employee's salary -- it's baffling why more high-income workers don't take advantage of what they're offered.

Similarly, although age is a definite factor, many older workers also don't take full advantage of this free money from their employers. More than one-quarter of workers age 40 to 65 don't max out their employer match.

Finding a fix
The lack of enthusiasm about 401(k) contributions is a concern to employers, who are increasingly looking to 401(k) plans as a substitute for traditional pension plans. Some companies, such as General Motors (NYSE: GM  ) , have had to cut back on 401(k) matches in recent years, but many businesses are taking steps to encourage 401(k) participation.

Automatic enrollment is one way to get employees to save. Kinder Morgan Energy Partners (NYSE: KMP  ) , PPG Industries (NYSE: PPG  ) , and Kennametal (NYSE: KMT  ) are just a few of the hundreds of companies that automatically enroll new employees to make 401(k) contributions unless they actively choose not to participate.

Other companies go further. For instance, IBM (NYSE: IBM  ) combines automatic enrollment with both a generous employer match and an additional amount on top of that, with special in-house target-date funds at extremely low costs. Google (Nasdaq: GOOG  ) matches 100% of contributions up to $2,500, or 50% of an employee's total contribution, whichever is higher.

Devon Energy (NYSE: DVN  ) gives employees a "super 401(k)" option, which allows them to let Devon take responsibility for making investment decisions. Combined with employer contributions of 8%-16% of the employee's payment into the plan, the result ends up looking a lot like traditional pension plans.

Meet your employer halfway
Although some companies give generous benefits even if you don't make any contributions to your plan, most employers don't make it that easy for their workers. But when you consider that you should be saving for retirement anyway, the extra incentive to put some money into your retirement-plan account may be exactly what you need to motivate you to fill out the forms and figure out your best investment options.

In the end, though, it's a pretty simple thing: When you have a chance to get extra money from a matching contribution, you owe it to yourself to take it. It's probably the only chance you'll ever have to as much as double your investment with no effort and no risk.

For more on planning for a successful retirement, read about:

Once you've contributed to your 401(k), you need to know how to invest your money. To get help with the basics of retirement investing, take a look at our Rule Your Retirement newsletter service. A free trial gives you access to past issues, discussion boards, and many other helpful resources for 30 days. There's no obligation.

Fool contributor Dan Caplinger contributes as much as he can to his 401(k) every year. He doesn't own shares of the companies discussed in this article. PPG Industries is an Income Investor recommendation. The Fool's disclosure policy never retires.

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