What To Know About 401(k) Matching

One of the leading benefits in corporate America is 401(k) matching. An employee can contribute a certain percentage or dollar amount of their salary into a retirement account — and their employer matches it. In some cases, employers will contribute a certain percentage. Dig into knowledge from experts on how to maximize your 401(k) contribution and make sure you understand the parameters of your plan. 

By Helen Harris

What if there was a way you could get free money? 

There is, and it’s called 401(k) employer matching. 

Your 401(k), as defined by the IRS, is a feature of a qualified profit-sharing plan that allows employees to contribute a portion of their wages to individual accounts. However, certain employers elect to match employees’ contributions as part of the company benefits package, dollar for dollar, or at a certain percentage. 

For example, Forbes further explains that for each dollar you save in your 401(k) plan, your employer would wholly or partially match your contribution up to a certain percentage of your salary.

401(k) matching is a key job benefit that can greatly help you reach your retirement goals and bolster your savings during your time at a company. 

“401(k) matching is essentially free money,” said personal finance and financial freedom enthusiast Kasey Ingram. “Your company is saying that if you put in a certain amount, they will match that — so if you're not taking advantage of that, you're leaving free money on the table.”  

How To Take Advantage of 401(k) Matching

The first way to take advantage of a 401(k) plan within your company is to be aware of your options and to fully understand all the details so you can make an educated financial decision.  

“lf you work for a corporation that offers a plan, make sure you know about it,” said Jennifer Bravo, CFP, CSRIC, Investment Advisor at Entrust Financial LLC. “Ask HR or look on the internal website, but make sure you have all the details.” If

Bravo states that key things that you should know include how you should enroll and how much you need to contribute to get a company match or contribution. It’s particularly important to get to know the details of your plan, as Bravo continues certain kinds of contributions that your employer makes on your behalf could be subject to vesting. 

She explains that this means that certain types of contributions made by an employer to your account may have a vesting schedule that requires you to work there for a certain amount of time before the money is legally yours.

“If you leave before that time, you'd be leaving some of that money behind,” said Bravo. “It's not usually a reason for anyone to not take a better opportunity, but it's something to be aware of because oftentimes, employees will be a little surprised when they roll over their old plan and  It's less than what they expected.”

So to avoid any surprises, Bravo stresses getting familiar with your plan interface and consulting with your HR team if needed.  

Ingram furthers that while you might not initially think it’s in the budget to contribute a certain amount to your 401(k), you can almost always find a way to cut out extraneous expenses. 

“If you look at your nonessentials, there's likely room there,” said Ingram. 

For example, he states that something as simple as cutting down half of your eating-out budget and putting it into your 401(k) could result in a financial win, as that money would be doubled.  

And although full matches from employers are an excellent benefit, you should consider taking advantage of any percentage match to your 401(k) from your company.

“If there isn't a match, it’s good to ask yourself, ‘Do I want to tie this money up until retirement, or is there a better opportunity cost to keep it for an investment now?’” said Ingram. “It’s important to be aware of what your company offers so you can put yourself in the best financial situation.” 

But Research Financial Strategies explains that the majority of companies offer some sort of matching contribution, for an average of 2.7% of a person’s pay.  

The source states that the most common 401(k) match is 50 cents on the dollar, meaning for every $1 you contribute to your company 401(k), your company will contribute 50 cents.

Consider these additional findings and facts from Research Financial Strategies: 

• 40% of companies contribute 50 cents for every dollar employees contribute up to 6% of their pay.
• 38% of companies match employee contributions dollar for dollar, but the maximum is normally lower – commonly 3%.
• Employers don’t match an unlimited amount (i.e, you can’t contribute half of your salary and expect your company to match that amount into your retirement account). 

If you do get the full 401(k) match, Forbes offers insight on how to maximize your employer’s match: 

• Start immediately. There may be a waiting period before the employer begins matching your contributions, but make sure you are already making contributions as soon as you begin. 
• Contribute the full amount each paycheck. This is important, as you want to make sure you take advantage of the employer match. 
• Make it automatic. Make sure you don’t forget to make contributions by signing up for automatic contributions at the full amount necessary to get the employer match. “One of the advantages of these plans is the power of payroll deduction,” said Jean Young, a senior research associate with Vanguard Investment Strategy Group, in Forbes. “You pay yourself first, automatically, every paycheck, making retirement savings easy.”
• Leave it alone. Don’t withdraw from your 401(k) account. It will be hard at times when you see the value of your investments steadily decline during economic downturns, but this will only harm you in the long run. “Especially for young investors, it’s important to remind people to stay the course even when the market is volatile,” said Katie Taylor, vice president of thought leadership at Fidelity Investments, to Forbes. “People who are younger have time to ride out market swings.”

What If My Company Doesn’t Offer a 401(k) Match? 

If your company does not offer 401(k) matching, you will still need to plan for the future and your retirement needs, so Ingram points to Roth IRAs as a great option.

“There's normally less flexibility with what you can invest in with a 401(k)match,” said Ingram. There might be a certain amount of portfolios that your company agrees to with other companies, and there might be higher fees as well.”  

Ingram also states that the Roth IRA is after-tax money, meaning it has the added benefit of not taxing you down the road in whatever tax bracket you are in at that point. Whereas with the 401(k), he explains that you will be taxed based on whatever bracket you fall in when you plan to access the funds.

Bravo mentions another key point when it comes to 401(k) matching: What about self-employed individuals? 

You are both the employer and the employee in this situation, as you are likely a freelance worker, contractor or running your own business. But there are options available to still contribute to your 401(k) as both the employer and the employee. 

“I tend to encourage people to look at a solo 401(k),” said Bravo. “It’s very easy to set up and is for someone self-employed who does not have any employees. It allows you to contribute to a 401(k) up to the same limits as anyone working for a company. However, if you have a lot of extra cash flow, it does allow you to contribute as the employee and the employer.” 

Regardless of if you work for a company that offers a direct match or a contribution up to a certain amount, the bottom line is that you are getting free money on top of the investment you are already making in your financial future. And it is in any employee’s best interest to set aside any amount of money possible to contribute to a 401(k) matching program — and watch the money amplify with time. 

“[The 401(k) match or contribution] is part of your compensation plan, so you don't want to leave it behind,” said Bravo. “When your employer is thinking about giving you raises and any other benefits, they factor in that money, so you want to make sure you're taking it home.” 

Top Takeaways 

What To Know About 401(k) Matching

• A 401(k) is a feature of a qualified profit-sharing plan that allows employees to contribute a portion of their wages to individual accounts
• 401(k) matching is a key job benefit that can greatly help you reach your retirement goals and bolster your savings during your time at a company. 
• “401(k) matching is essentially free money. Your company is saying that if you put in a certain amount, they will match that.” 
• The first way to take advantage of a 401(k) plan within your company is to be aware of your options and to fully understand all the details so you can make an educated financial decision.  
• While you might not initially think it’s in the budget to contribute a certain amount to your 401(k), you can almost always find a way to cut out extraneous expenses.