In days gone by, companies offered pension plans to help pay for their employees' retirement expenses. Now, more often than not, the burden is on you, with companies switching to 401(k) plans.
If you aren't enrolled in your company's 401(k), you could be missing out not just on retirement security, but also free money! Here's what you need to know and why every paycheck you miss a 401(k) contribution potentially means losing money.
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What is a 401(k) plan?
If you have a pension plan, the company you work for (or used to work for) takes on the burden of ensuring you collect a regular check each month after you retire. This is a defined benefit plan. Often those checks get adjusted for rising costs, also known as inflation. With life expectancy rising, however, companies wanted out from under the growing financial burden of pensions. And so they started offering defined contribution plans, which shifted the burden for saving onto the employee.
Defined contribution plans are what you have if you have a 401(k) plan. Essentially, your company no longer has to worry about rising costs and increasing life expectancies. You have to deal with that and the company has attempted to help you by offering a tax-advantaged savings vehicle. You might think that most people would jump at the chance to save, but there's an interesting twist here. Some plans have automatic enrollment, while others require employees to opt in.
With automatic enrollment, 90% or more of employees start in their company's 401(k) plan across age groups. When an employee has to opt into the plan, the numbers aren't nearly as good. The highest enrollment rate is 75% among those aged 55 to 64. The lowest is a frightening 25% for those younger than 25.
|
Vanguard Retirement Plan Participation Rate by Age 2024 | |||
|---|---|---|---|
| Age |
Voluntary enrollment |
Automatic enrollment |
All |
|
<25 |
25% |
90% |
54% |
|
25–34 |
62% |
94% |
82% |
|
35–44 |
71% |
94% |
86% |
|
45–54 |
74% |
94% |
87% |
|
55–64 |
75% |
95% |
87% |
|
65+ |
65% |
92% |
79% |
Data source: Vanguard
Don't miss out on this easy retirement savings boost
Saving money isn't fun. It requires you to defer spending today with the hope that you will be able to spend more money in the future. So it is easy to understand why someone under 25 might not enroll in a 401(k) plan -- it is way more fun to spend all of your cash! It is also understandable that saving money could be hard across all of the age groups above if your spending needs are close to your income.
But remember the defined contribution label from above. One of the reasons for the defined contribution terminology is because companies may put some money into the 401(k) plan, too. But it is usually limited to what is called "the match." Essentially, your employer might match your contribution dollar for dollar up to a certain percentage of your income. In 2024, Vanguard found that the median match was 4% across the 401(k) plans it oversees. That is free money that you are giving up if you don't join your company's 401(k) plan and put aside at least as much as your company is willing to match.
There are three big takeaways here. The first is that every paycheck that goes by is a missed opportunity if you aren't enrolled in your company's 401(k) plan. Second, once you get enrolled, the match will be automatic. You just have to invest the time to set it up once! And third, the match is a 100% return on your investment that you'll collect each and every paycheck.
Nobody will offer you a better deal
Doubling your money without taking any risk is unheard of on Wall Street. There's no investment out there that could achieve that, not stocks and not bonds. And if you aren't enrolled in your company's 401(k) plan and putting aside at least enough to get the match, you are missing out on a simple way to materially boost your retirement fund without taking on any investment risk. Don't let another paycheck go by -- every month you delay is, literally, costing you free money.
