How Does a 401k Match Work and Does it Really Matter?
If you’ve ever heard the term 401k match and don’t know what it means, you’re not alone. Most Americans, even those who are eligible for a 401k match at work, aren’t sure what a 401k employer match is or even if there’s a benefit for their retirement savings. Keep reading to get a better understanding of the impact of a 401k match and how it affects your family.
How Does A 401k Match Work?
A 401k match is a way employers can encourage employees to participate in a retirement plan. When you choose to put money in a 401k that offers a matching contribution, the company will put in money alongside what you put in. How does the 401k match work at your company? It depends. Your employer doesn’t have to offer a match at all. For those that do, the approach and generosity will vary just like your other employee benefits.
401k Match Approaches Explained
Your company can apply a match for 401k participants in a number of ways. The options include:
Partial Match for Your 401k
If a 401k plan offers a partial matching benefit, then your company will match a portion of what you put in up to a specified limit. For example, a company could off a partial match of 50% up to 4% of your salary. If you decide to save 2% of your salary, the company will put in the equivalent of 1% of your salary. If you decide to save 4%, the company will put in the equivalent of 2% of your salary. If you decide to save 5% of your salary, the company still only puts in the equivalent of 2% of your salary because that’s the maximum they offer.
Example of how a company can describe a partial match
Dollar-for-Dollar Match for Your 401k
If a 401k offers a dollar-for-dollar match, then your company will contribute the same amount you do up to a specified limit. For example, a company could offer a dollar-for-dollar match up to 4% of your salary. If you decide to save 2% of your salary, the company will put in the equivalent of 2% of your salary. If you decide to save 4%, the company will put in the equivalent of 4% of your salary. If you decide to save 5% of your salary, the company still only puts in the equivalent of 4% of your salary because that’s the maximum they offer. A dollar-for-dollar match is sometimes referred to as a full match, 100% match, or full matching contribution.
Example of how a company can describe a full match
Combination Match for your 401k
Your employer can also decide to offer a combination of the above matching methods. For example, an employer could offer a full match up to 2% and then a partial match on anything above that. Ultimately, within the IRS limits, the company can customize the matching approach offered to employees. An employer can also offer a tiered match approach that varies by your age or tenure with the company.
Example of a company that uses a combination of full and partial matches
Other Contributions Your Employer Can Make
Outside of a match, your employer can decide to make other kinds of contributions to your 401k. Unlike matching contributions, these other contributions are not dependent on how much you withhold from each paycheck. This could be a profit-sharing contribution where the employer contributes based on the company’s performance or some other method. Some companies off a match and other types of contributions while others offer one but not the other.
Vesting on 401k Matching
Similar to other benefits at work, your employer wants to encourage you to stay. Some employers use the 401k to encourage retention by using a concept called vesting. Vesting on 401k matching means that you must stay at the company for a set period of time for the money (what the company put in) to be yours if you decide to leave. Some 401ks don’t have vesting requirements so it’s not an issue. For 401ks that do have vesting on 401k matching, the approach varies. For example, the 401k could have a graded scale that means for every year you stay more of the 401k is yours to keep no matter what. This eventually reaches 100%. Others decide to use a “cliff vesting” approach. In this approach, after you reach a number of years of service, 100% becomes yours to keep all at once. Keep in mind vesting can only apply to money your employer puts in, if at all. Money you put in is always yours to keep.
Example of one company's approach to vesting
Does a 401k Match Contribution Make a Difference?
Absolutely. A 401k match is the closest thing you can get to free money at your job. If you choose to not take advantage of a 401k match at your company, you are not taking advantage of one of the best ways to grow your money almost immediately.
Let’s take someone with a 401k that has a salary of $50,000 per year. They decide to contribute 2% of their salary to their 401k. Because they decided to invest in diversified investments, we’ll assume an average annual return of 7%. That 2% grows to around $97,000 over 30 years due to continued contributions and compounding.
Let’s then take the same person who made the same decisions, but the company offers a dollar-for-dollar match on their 2% contribution. With all the same assumptions, the same person ends up with over $196,000 at the end of 30 years! Because the match came out of the company’s pocket and not theirs, it didn’t cost them a thing. How does 401k matching work when it comes to helping you retire easier? Everything helps, but it helps even more when it's someone else's money and not yours!
"For you yourselves know how you ought to imitate us, because we were not idle when we were with you, nor did we eat anyone's bread without paying for it, but with toil and labor we worked night and day, that we might not be a burden to any of you." 2 Thessalonians 3:7-8 ESV
How to Know if Your Current Employer Offers a 401k Match
It should be very easy to determine if your company’s 401k has a match for the 401k. If the company’s 401k provider has a login to check your balance, the details of the plan should be readily available including the match. Most companies make this information available via HR as well. If you’re unsure, call and ask so you make sure you’re maximizing this awesome retirement benefit.
How to Know if a Potential Employer Offers a 401k Match
If you’re applying for a job at a new company, make sure you ask about benefits like the 401k. This is a meaningful part of your compensation and should be a consideration as you weigh the differences between a current job and potential new job. If you’re going from a job that has a generous 401k match to a job with none at all, don’t overlook that in the salary negotiation or decision process.
Other Factors to Consider Beyond a Match
Although a matching contribution is very valuable, it is still one of several factors in retirement accounts like a 401k. This includes other contributions your employer might make, fees, investment options, services offered, and more. A match alone, or lack thereof, does not tip the scales for whether you have a “good” 401k or not. Ask questions and educate yourself on the specifics, just like your other work benefits so you family can get the most out of what is offered.
How to Get the 401k Match
For almost all 401ks, if you contribute a percentage of your paycheck to your retirement account, then the match should happen automatically. If you’re not sure, just ask HR or the 401k provider. Missing out on the match means you’re missing out on your company giving you money. Don’t miss out.
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