A 401(k) match or other employer contributions help you build wealth for retirement much faster than you could on your own. But 401(k) matches vary considerably by employer, and there are sometimes waiting periods before you qualify for a match and vesting schedules that might prevent you from keeping the money when you leave an employer. Here’s how to make the most of a 401(k) match.
[See: How to Max Out Your 401(k) in 2017.]
Find a job with good retirement benefits. Only about half (47 percent) of private employers provide retirement benefits, such as a 401(k) plan, according to 2016 data from the Bureau of Labor Statistics. Large companies with 500 or more employees are much more likely than smaller firms to have a 401(k) plan. A few specific industries also tend to offer generous retirement benefits including utilities, information companies, credit intermediation firms, insurance carriers and colleges and universities. “There can be norms by industry,” says John Scott, director of the retirement savings project at The Pew Charitable Trusts. “Certain industries don’t offer as many retirement benefits as others.”
Find out what proportion of your salary might be matched. Employers match an average of 3.8 percent of employee paychecks, according to a Plan Sponsor Council of America survey of 614 401(k) plans and similar types of retirement accounts. If you earn a $50,000 salary, this employer contribution could be worth $1,900 in additional compensation. Some companies require employees to save a portion of their salary in the 401(k) plan in order to qualify for employer contributions. “Find out the employer matching to your 401(k), if applicable, and make sure you are saving that percentage amount,” says Rianka Dorsainvil, a certified financial planner and president of the financial planning firm Your Greatest Contribution. “Then, if you still have some discretionary cash flow, throw on a few more percentages to savings.”
[See: 9 Ways to Avoid 401(k) Fees and Penalties.]
Watch out for service requirements. Most companies (61 percent) allow new employees to begin saving in the 401(k) plan immediately upon hire, but some firms have service requirements between three months and one year before employees are eligible to begin contributing to the 401(k) plan, the Plan Sponsor Council of America survey found. Even fewer companies (44 percent) provide immediate eligibility for a 401(k) match. A quarter of companies require a year on the job before employees qualify for a 401(k) match. If your employer has a waiting period, take note of the date when you can sign up and begin to claim tax breaks and employer contributions.
Pay attention to the match formula. Company contributions are provided using a wide variety of match formulas. “One of the most common formulas we see is matching 50 cents for each dollar the employee contributes up to 6 percent of salary,” says Catherine Golladay, senior vice president for 401(k) participant services and administration at Schwab Retirement Plan Services. “In other words, to get the full match from the employer, the employee contributes 6 percent of salary and the employer contributes another 3 percent of salary. The employer would not match additional contributions from the employee above the 6 percent.” Another popular match is a dollar-for-dollar contribution up to 4 to 6 percent of pay.
A match formula with a high savings requirement could help motivate you to save more for retirement than you otherwise would, but also makes it difficult for workers who are only able to save a small amount to take advantage of the match. For example, a worker who earns $50,000 per year and saves 6 percent of his pay in a 401(k) plan that matches 50 cents for each dollar saved up to 6 percent of pay would get a 401(k) match worth $1,500. However, a co-worker earning the same salary who is only able to save 3 percent of his pay would get a much smaller employer contribution worth $750.
[Read: How Long Does it Take to Vest in a 401(k) Plan?]
Don’t leave a job before you are vested. Fewer than half (47 percent) of 401(k) plans provide immediate vesting of employer matching contributions, according to a Vanguard analysis of 1,900 plans with more than 3.9 million participants. Some 401(k) plans don’t allow workers to keep any employer contributions until they have remained on the job for two or three years. Other firms permit employees to keep a fraction of the employer contributions based on their years of service, but they might not get to keep it all until they have remained with the employer for five or six years. When making job change decisions, remember to factor in the company vesting schedule and how much money you might be leaving behind. “Know how vesting for your current 401(k) plan works and how many years of service you have toward vesting,” says Clint McCalla, a certified financial planner and founder of the Wealth Planning Company of Texas. “Understand in dollar terms how much of your employer 401(k) contributions are vested now and how much vests each year.”
Emily Brandon is the author of “Pensionless: The 10-Step Solution for a Stress-Free Retirement.”
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How to Get a Good 401(k) Match originally appeared on usnews.com
