If your boss is offering free money, why would you turn it down? Photo source: 401kcalculator.org via flickr.

According to a recent report, millions of Americans are not taking full advantage of their employers' retirement matching contributions. In fact, people leave an estimated $24 billion on the table each and every year. And while a small percentage of your salary might not sound like a big deal, failing to take this free money from your employer and investing it can be devastating to your retirement savings.

The data is alarming – why aren't more people taking advantage?
A report by Financial Engines examined the records of 4.4 million retirement plan participants, and found that one-fourth of employees whose companies offer a match aren't taking full advantage. Of this unfortunate group, the average person leaves $1,336 on the table each year, and some are giving up a lot more than that. A quick calculation suggests that nearly 18 million Americans are not fully utilizing their employer's matching programs.

There are several possible reasons for this. For instance, more than half of all companies with retirement plans have auto-enrollment programs that are designed to increase the number of workers who save. However, the most common default contribution rate is 3%, and 60% of companies use this default rate or less. Meanwhile, many employers are willing to match more than this amount, so default contributors don't take full advantage in many cases.

It's also possible that many people simply believe that boosting their contributions by a few percentage points really won't make a difference. After all, if you earn $50,000 per year, how much of a difference will an increase from 3% to 6% of your salary -- or $1,500 per year -- really make in terms of your quality of life in retirement? You might be surprised.

Why it makes such a big difference
Missing out on $1,336 isn't in itself such a huge deal. But how much of a difference do you think $1,336 per year would make over say, a 35-year career? Do the math, and it adds up to almost $47,000.

That could make a serious difference in your quality of life in retirement. And remember that this is free money. Any contributions that come from your salary are in addition to this.

Yet even this number ignores the value of investing that $1,336 per year. For a more thorough example, consider an employee who earns $50,000 per year at the start of his or her career. Let's say that the employer is willing to match 100% of contributions up to 6% of the salary. Just look at what a difference this can make over the long run.

Employee's contribution Employer's contribution Value after 35 years
3% 3% $520,602
4% 4% $694,135
5% 5% $867,669
6% 6% $1,041,203

Note: Assumes 2% annual salary increases and 7% average investment returns.

Finally, the amount your employer is willing to match should be looked at as a bare minimum. You can -- and should -- contribute even more to your retirement savings. In fact, the IRS allows for elective 401(k) contributions, not including your employer's match, of up to $18,000, or $24,000 if you're over 50. Increasing your retirement contributions may seem like a burden now, but you'll thank yourself later.

Would you throw out a $100 bill you found on the ground?
If you found some cash sitting on the ground, would you pick it up and throw it in the trash? Of course not! However, if you don't take full advantage of your employer's matching contributions, that's exactly what you're doing.

Your employer plans to make those contributions as part of your compensation package. Not taking advantage is like agreeing to a pay cut, and as we've seen, can have a dramatic affect on your long-term financial health.