If your employer is offering you free money, take it. Photo: Source

You may think you're doing just fine saving for retirement -- and you might think you're doing all you can, too. But many people are missing out on a great opportunity to grab free money, and lots of it -- through the matching funds offered by their employers in 401(k)s plans.

Imagine, for example, that you're diligently saving lots of dollars and socking them away in an inexpensive broad-market index fund. That's an excellent thing to do, and you can build a lot of wealth that way over many years. Even super-investor Warren Buffett would endorse that, as he has prescribed  such an investment strategy for much of the money he'll be leaving to his wife.

If you manage to sock away $6,000 each year for 20 years and you earn an annual average of 10% on it (the stock market has averaged close to that over many decades), then you can end up with $378,000 . Pretty good, eh?

You should be able to do even better than that, though, if you take full advantage of your workplace's 401(k) plan.

401(k) freebies

Both 401(k) accounts and IRAs permit you to sock away lots of money for retirement in tax-advantaged ways. There are traditional and Roth varieties of both: The traditional ones giving you a tax break now by letting you deduct your contributions from your taxable income in the year you invest them, while with the Roths, you contribute post-tax dollars to an account that you can eventually withdraw from tax-free (meaning, no capital gains taxes on those investments in retirement).

IRAs offer the advantage of more freedom in how you invest your contributions. If you open an IRA at a good brokerage, you'll be able to put your money into any of thousands of stocks and perhaps hundreds of mutual funds. By contrast, employer 401(k) plans typically offer a limited menu of options. Inexpensive index funds are often among them, though, so it isn't necessarily that bad of a drawback.

But one of the most attractive features of a 401(k) is matching funds, where your employer offers to chip in extra dollars to your account, matching what you contribute according to a formula. A common arrangement is that the employer will match 50% of what you contribute, up to a certain percentage of your annual wages, or a set amount, say, $6,000 a year. That means you would stand to collect a solid $3,000 each year in free money (and guaranteed money, too, by the way) if you contributed $6,000.

Let's return to our previous example now. Remember how you might accumulate almost $378,000 by saving and investing $6,000 each year for 20 years? Well, imagine that you were saving and investing $9,000 instead, thanks to an employer match. You'd end up with ... $567,000!

Years of money left on the table can really add up. Photo: Damian Gadal, Flickr

Survey says...

If you're kicking yourself now for ignoring or under-utilizing your ability to get free money from your employer, you're not alone. The folks at Financial Engines studied the 2014 data on 4.4 million retirement accounts at 553 companies and found  that 25% of plan participants weren't taking full advantage of matching money offered, and that the average amount of free money people left on the table each year was $1,136.

That might not seem like a lot, but Financial Engines estimated that over 20 years, it can amount to $42,885 lost (and that's based on conservative estimates featuring a fixed salary and a modest 4.5% growth in your account). The annual total sum left on the table was estimated at about $24 billion -- clearly not chump change.

Here are some other interesting findings:

  • There were more available matching dollars unclaimed than claimed.
  • The proportion of those maximizing their matches rises as income level rises. Nearly half of those earning less than $20,000 failed to grab all the matching dollars available to them.
  • The proportion of those taking maximum advantage of their matches rises along with age. This is not surprising, but it's also unfortunate, since -- due to the power of compound growth over time -- younger people have the most to gain from every invested dollar.

Finally, consider this tidbit: "The $1,336 left on the table amounts to 2.4% of salary on average. Thus, employees are effectively giving up the equivalent of an extra 2.4% of their income each year by not taking full advantage of employer matching contributions."

That's a helpful and motivating way to think about it: You have the ability to give yourself a raise just by contributing to your 401(k).

Smart strategies
While it's almost always smart to take all the free matching dollars you can get, that doesn't necessarily mean you need to plunk all your retirement savings into your 401(k). If you value the wider investment options of an IRA, or you seek the tax savings of a Roth and your employer doesn't offer a Roth 401(k), you might do well to only invest in your 401(k) only as much as you need to in order to maximize the match. Beyond that, you might invest your next available dollars in an IRA. Depending on your situation, needs, and preferences, you may have other attractive options, too.

Just don't pass up any free money that your employer might be offering you.