Do you work for a company that offers a 401(k) plan to its employees? If so, then congratulations! Not everyone does. Only about two-thirds of all U.S. workers have access to what's arguably the kind of retirement account with the greatest potential for building wealth.
The trick, of course, is making the most of the opportunity.
Here's a look at the single most important thing you'll want to do with your 401(k) plan -- no matter who you are, or where you are in your career.
Get your free money
Did you know that almost all organizations providing a 401(k) plan to their employees are willing to contribute free money to these accounts? It's true! The Plan Sponsor Council of America reports that 98% of plan sponsors will chip in something on behalf of their workers.
It's not a fortune, to be clear. The typical amount ranges anywhere from 3% to 6% of the employee's salary. Mutual fund giant and retirement plan administrator Vanguard says that in 2023, its corporate clients' average contribution to workers' retirement accounts was 4.6% of their pay.
Still, money's money.
Image source: Getty Images.
The only catch? The employer's contribution is only a match of the amount of money the employee is tucking away in the retirement account for themselves. If the worker only contributes 2% of their own salary to their 401(k), the employer only matches that 2%. If the employee puts in nothing, neither does the company.
There are also limits. Even if workers contribute more than their employer's matching rate, the organization will still only match up the aforementioned 3% to 6%... depending on the company's willingness and ability to pony up the additional cash above and beyond their workers' salaries.
These capped matching contributions still aren't chump change, though. Fund company and plan administrator Fidelity reports that during the third quarter of 2024, its typical 401(k) plan sponsor chipped in an average of $1,240 for each of their employees' retirement accounts, versus employees' average contribution of $2,350 of their own money into these same retirement plans.
Do the math. Companies themselves are currently accounting for about one-third of the savings being socked away in workplace retirement accounts.
For perspective, a quarterly contribution of $1,240 collected for a period of 30 years would add up to nearly $150,000 worth of total free money. And assuming it's invested in the stock market that whole time, this amount could grow to nearly $1 million at the end of those 30 years, based on a 10% average annual return.
Honorable mentions
Securing your company's full 401(k) match isn't the only goal you'll want to embrace when saving for retirement. There are two other "close seconds" that merit adding to your to-do list.
First, start saving as early as possible -- even if it hurts a little, and even if it's not much. Even a few hundred bucks every now and then can make a world of difference later, since time is your best ally when it comes to building a retirement nest egg.
The image below visually illustrates the point, comparing the difference between saving $500 per month for 20 years versus $500 every month for 30 years. Assuming the stock market's average annual gain of 10% for both scenarios, getting started just 10 years earlier would make a difference of roughly $750,000 at the end of the 30-year stretch. That's because with the 30-year scenario, you're ending the first 10 years with just a little over $100,000 worth of compounded savings.
Data source: Calculator.net. Chart by author.
You can't even save that much? That's OK. Again, do what you can do as soon as you can do it. Something is better than nothing. You just want to plant some seeds so you're not starting out with nothing once you can start making bigger contributions later.
The second piece of bonus advice? As tempting as it may be to own some of the seemingly fancier funds -- or even discounted shares of your employer's stock -- in your 401(k), a simpler option may also ultimately be the better one.
See, most mutual funds don't beat the market. Standard & Poor's reports that over the course of the past five years, 77% of large-cap mutual funds available to investors in the United States actually underperformed the benchmark S&P 500 index. For the past 10 years, nearly 85% of these funds lagged the market. And no, the few funds that beat the market in one timeframe almost certainly didn't do so for the other.
If you want to play the smart odds, your best bet isn't trying to beat the market. It's just trying to match the market's long-term performance by owning simple index funds.
Just remember that the best return you'll ever see on any of your retirement savings is the 100% gain you'll immediately achieve by contributing enough money to your 401(k) to max out your company's matching contribution.
