The 401(k) match is an attractive compensation strategy that employers use to attract and retain their employees. Additionally, as an employee, you can also invest a portion of your salary to save money for retirement.

Are you thinking about retiring? Here are some criteria you should consider when your employer offers you a 401(k) savings plan.

The definition of the employer match

For an employee, a 401(k) match is defined as one of the primary benefits offered by the employer. It is an employer-sponsored contribution plan in the U.S. designed to match the contributions you have made from your salary and bonuses.

Similar to 403(b) or 457(b) plans, the employer contributes a percentage of your compensation to the 401(k) savings plan for your retirement. Although they have minor differences, they generally have the same contribution limits.

How the 401(k) match works as a guaranteed return

Although the employer chooses how the 401(k) match will work, they generally follow a mathematical formula. They may make the full contribution; that is, they match 100% dollar for dollar. However, they can also opt for a partial mode, such as 50%.

Some companies often combine both modalities. However, it is the employer who decides which portion of the contributions will be fully matched and which will be partially matched.

The employer may apply the following configuration: match dollar for dollar up to 3% of salary. Then they match 50% of each dollar until the total reaches 5%. In these cases, contributions exceeding 5% are not matched.

Understanding the match formula (e.g., 50% up to 6%)

Employer contributions are generally made with each payroll payment, although some companies may make them annually. The 401(k) contribution can be made in two ways: partial or complete.

In the first case, a partial match means that the employer will match a portion of the money the employee invests in the 401(k). The most common formula is 50% of your contribution, up to 6% of your salary.

Please note that if you contribute more—say, 8%—the employer will only match half of 6% of your salary. This is because that’s the maximum 401(k) matching limit.

Calculating the optimal contribution to get the full benefit

The optimal contribution for a 100% benefit refers to a dollar-for-dollar match. This means that the employer contributes the same amount as you. In this modality, only 4% of your salary is considered.

In other words, if you contribute 4%, the employer will contribute 4%; if you contribute 2%, the company will contribute 2%. However, if you contribute 6%, the employer will only contribute 4% because that’s the maximum matching amount.

Vesting schedules explained

While it’s true that you need to know the rules for the 401(k) match, it’s also essential to understand how the vesting schedule works. In this sense, it refers to the employer’s contributions that truly belong to the employee.

Vesting is based on the length of time you work at the company. The vesting period for the 401(k) matching plan is five years. Therefore, if you retire or are terminated before this period is up, you may lose some or all of the contributions.

Keep in mind that this savings plan is intended for retirement. This means you’ll face a 10% penalty and other taxes if you withdraw the money before the required age. However, if you reach age 59½, you can access the funds without any issues.

When the employer’s contribution truly becomes yours

Employer contributions become the employee’s “property” once the vesting period—whether gradual or complete—is met. This happens even if the employee leaves the job, which protects their retirement funds.

Furthermore, this “extra” money that the employer deposits for being a disciplined saver does not constitute wages. That’s why the employees must meet certain conditions, such as percentage thresholds and a vesting period.

The general term for the plan is “vesting,” which means that the money contributed by the employer is not immediately yours. In contrast, you must “earn” it by working for the period specified in the plan.

Why is failing to contribute to the match a financial mistake?

Not contributing to a 401(k) plan is considered a grave financial mistake because you’re leaving the employer’s matching funds on the table. Similarly, you miss out on interest growth and tax deferral, delaying your financial independence.

Below, we explain the main mistakes of not contributing:

• You’re leaving money on the table. Not participating in this plan is like finding a bill and not picking it up; the employer’s extra money is easy income and carries no risk.
• Tax consequences. You can avoid paying taxes now, but you lose the tax deferral and the interest increase. That way, you end up paying more or not having the money to cover long-term expenses.
• Loss of opportunities. If you choose not to contribute to the 401(k) match, you’re giving up the opportunity to diversify your investments tax-efficiently and enjoy the benefits of retirement.

Ultimately, the 401(k) is a long-term savings strategy that makes it easier to accumulate wealth for retirement. So, if you don’t contribute to this plan, you’d be giving up a guaranteed pay raise that increases over time.

Put your retirement savings tools into practice.e

The 401(k) retirement plan means that the money your employer contributes will grow over time. Over the years, the earnings in the account may exceed the contributions made.

And if you’ve found this information an interesting option for your retirement, at CredHelper, we suggest supplementing your financial knowledge with a budgeting app.

Frequently Asked Questions

What is the 401(k) plan?

It is a plan of additional contributions made by employers to employees’ 401(k) accounts. These contributions are made on a percentage basis, based on a mathematical formula that takes the employee’s salary into account.

What is considered a good 401(k) match?

A generous 401(k) retirement plan would be a full contribution consisting of 100% of the allowable limits. However, in either case, the plan is beneficial, as it is considered additional compensation for the future.

What does a 6% contribution to a 401(k) plan entail?

It refers to a mathematical formula that the employer uses to match up to a total of 6% of an employee’s salary contributions. This means that if a person earns $60,000 USD per year, the contribution will not exceed $3,600 USD.