Understanding 401(k) Match and its Impact on Retirement Savings

Investing in a 401(k) Match Plan

When it comes to investing, there are few certainties. Stock market fluctuations often lack predictability and are influenced by unstable news cycles and investor sentiment. However, one outlier in the investment world, according to financial advisors, is the 401(k) match.

Under a 401(k) match plan, employers provide a matching contribution to their employees’ retirement savings, typically up to a certain limit. Often referred to as ‘free money’ by advisors, this matching contribution can effectively double an investor’s money, providing a 100% return on investment.

How the 401(k) Match Works

A typical example of a 401(k) match plan involves an employer matching an employee’s 401(k) contribution dollar for dollar up to 3% of the employee’s annual salary. If an employee contributes 3% or more of their salary, the employer will contribute the same amount.

“One of the rare guarantees on an investment that we have,” said Kamila Elliott, a certified financial planner and co-founder of Collective Wealth Partners, based in Atlanta, “is the 401(k) match.”

Availability of 401(k) Matches

Around 80% of 401(k) plans offer a matching contribution according to a 2023 survey by the Plan Sponsor Council of America. The exact match that employees receive varies depending on the employer’s formula.

The most common formula offers a 50-cent match for every dollar an employee contributes, up to 6% of their salary. This means, if an employee saves 6% of their pay, they can receive another 3% from the company match, making a total of 9% in their 401(k).

The Benefits of a 401(k) Match

“Where else can you get a guaranteed return of more than 50% on an investment? Nowhere,” according to Vanguard, a 401(k) administrator and money manager.

Financial advisors generally recommend that people with a 401(k) should aim to save a minimum of 15% of their annual salary, combining both employee and company contributions.

Vesting Requirements of a 401(k) Match

However, the ‘free money’ from a 401(k) match may come with some conditions, including ‘vesting’ requirements. Vesting refers to the minimum tenure required for an employee before they can fully claim the employer’s match.

Nearly 60% of companies require an employee to stay with the company for two to six years to be eligible for the full match, according to the PSCA. Employees leaving before fulfilling this requirement may forfeit some or all of their match.

However, some companies offer immediate vesting, where there are no tenure limitations, and the matching contribution is immediately the employee’s to keep.