If you're getting serious about saving for retirement, it pays to use the full functionality of your 401(k). That functionality includes automated contributions and investments, tax-deductible deposits, tax-deferred earnings, and -- the big one -- employer match.
Your employer matching contributions can be the difference-maker in your retirement plan. According to a recent report from financial company Fidelity, the average employer contribution is $4,114 per year. That contribution by itself can grow to $570,000 in 35 years with an average annual return of 7%.
There is a process to realizing that $570,000, however. Follow these four steps to see the full benefit of your employer match in your 401(k) balance at retirement.
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1. Contribute
To start, find out your employer's matching rules. Some employers match $1 for every $1 you contribute, up to a cap. Other matching programs are less rich -- they might contribute $0.50 for every $1 you contribute, also up to a cap.
Once you know the rules, set your contribution so you're earning the maximum employer contribution available.
2. Set investment selections
Some 401(k)s automatically choose default investments for you. Others will leave your contribution in cash or a cash equivalent until you select your funds. Either way, you should log into your account and confirm your contributions are invested appropriately.
The simplest investment choice is a target-date fund or TDF. These funds offer a mix of stocks and bonds that's tailored for your retirement timeline. As you near retirement, the fund's portfolio gradually rebalances and becomes less risky. This protects you from excessive volatility at the start of your retirement.
Alternatively, you can create your own mix of stocks and bonds by combining two or three different funds. If you like this path, read up on strategies for tailoring your asset allocation to your age.
Asset allocation practices can help you invest with the right amount of risk. You need enough risk to maximize the value of your matching contributions but not so much that you're feeling the full force of every stock market blip.
3. Get 100% vested
Vesting is the ownership transfer of matching contributions from your employer to you. Although your matching contributions show up in your 401(k) balance immediately, you don't fully "own" those contributions until you are 100% vested.
Your company's vesting rules may require you to stay with your employer for several years before you are 100% vested. If you switch jobs too soon, you forfeit all or some of your matching contributions. You also give up all future earnings on those contributions, which can add up.
Learn your employer's vesting rules. Then, commit to staying with your job until you fully own your match unless a more valuable opportunity arises.
4. Roll over the balance when you change jobs
Even if your job doesn't prove to be a long-term keeper, you can roll over your entire 401(k) balance into an IRA or 401(k) with a new employer.
You have two rollover options:
- Direct rollover. Do a direct rollover if possible. A direct rollover moves your funds from one account to another. This is the simplest way to avoid IRS taxes and penalties.
- Indirect rollover. If your 401(k) sends you a check, you must do an indirect rollover. The check will be your balance, less 20% withheld for taxes. That withholding complicates things, because when you roll the funds into a new account, you must deposit the full amount that was in your 401(k) previously -- including the 20% withheld for taxes. That means you'll have to cover the 20% from another source. This can be tough if you don't have extra cash on hand.
Any amounts you don't roll over are subject to income taxes plus a 10% penalty for early withdrawals. Worse, the funds will no longer be earning tax-deferred income.
Employer match is valuable
Your employer match could be the reason you reach your retirement savings goals. Earning your match, investing it, and holding onto it for the long haul puts you on a great path toward a rich and comfortable retirement.
