A 401(k) match can do a lot to ease the burden of saving for retirement, and many employers offer a match to attract and retain top talent. But employers determine their matching formula in different ways. Some companies offer a dollar-for-dollar match, while others match just $0.50 per dollar, and still others may offer a profit-sharing contribution instead.
Fortunately for employees, companies are beginning to shift to more generous 401(k) matching formulas, according to a recent survey by the Plan Sponsor Council of America (PSCA). Let's go over the findings of the survey and what it could mean for you.
Dollar-for-dollar matching and profit-sharing are increasing
The PSCA study looked at the 2017 401(k) plan experience for 605 employers and compared it to findings from previous years. The results: 63% of employers offer some sort of 401(k) match or profit-sharing contribution, and those that do are offering more generous terms to their employees.
The survey found that dollar-for-dollar matching above 3% increased by nearly 50% from 2016 to 2017, with many of these employers now offering dollar-for-dollar matching on the first 6% of an employee's salary. Meaning, if you contribute 6% of your salary to your 401(k) every year and your employer offers a 6% dollar-for-dollar match, you're now putting away 12% of your salary for retirement each year.
The average employer contribution among companies offering a 401(k) match increased to 5.1% of pay, according to the PSCA survey; This is a new high, up from 4.8% in 2016.
A 0.3% difference appears paltry, but if your salary is $50,000, that extra $150 in employer-contributed funds toward your retirement goes a long way thanks to compound interest and the power of time. Over 30 years, that amount alone could grow to $1,142, assuming a 7% rate of return.
How to make the most of your employer 401(k) match
It doesn't matter how excellent your 401(k) match is if you don't take advantage of it. Unless you absolutely cannot afford to have the small amount of money taken out of your paychecks, you should always contribute at least enough to your 401(k) each year to maximize your employer's match. After all, it's some of the only free money you'll ever get.
Your company's HR department should be your first stop if you have questions about your company's matching policy. It's also a good idea to ask them about the vesting schedule, which is the timing of when the funds contributed by your employer become yours to keep.
Some companies may offer immediate vesting, but it's more common to see a graded vesting schedule where, for example, after one year, 25% of the funds are yours to keep, after two years, 50%, and so on. Alternatively, some companies may require you to wait a set number of years before you are allowed to keep any employer-matched funds. If you leave the company before you are fully vested, you will forfeit some or all of your employer's contributions.
What if your employer doesn't match 401(k) contributions?
If your company is one of the 37% that doesn't offer any employer 401(k) contributions, it's up to you to decide whether it's worth contributing to the plan, based on its fees and investment options.
It may be smarter, and cheaper, to open an Individual Retirement Account (IRA). 401(k)s tend to be more expensive than IRAs, especially for smaller businesses where there are fewer employees to spread the administrative costs among. They also tend to have fewer investment choices than IRAs.
You can figure out how much you're paying in fees by checking your 401(k) plan summary or looking at the prospectus for your investments. If you're paying more than 1% of your assets in fees each year, consider switching to lower-cost investment products (like index funds, if they're available) or moving your savings into an IRA.
On the other hand, if the fees for the 401(k) are reasonable and you plan to make a large retirement contribution, your 401(k) is the better choice because you can contribute up to $19,000 to a 401(k) in 2019, compared to just $6,000 to an IRA. People who are 50 and older can make an additional catch-up contribution of $6,000 to a 401(k) and $1,000 to an IRA.
A 401(k) match isn't just another workplace perk like nap rooms and ping pong. It can make a real difference in when you can afford to retire and what saving for retirement looks like for you.
If you don't know it already, take some time to research your company's matching formula and vesting schedule. Once you're armed with that knowledge, you can make sure to contribute at least enough money to your 401(k) to take advantage of any free cash being offered to you.