The fastest way to increase your retirement savings is to get 401(k) contributions from an employer. Company 401(k) contributions will grow your account balance far faster than you could on your own. But 401(k) contributions vary considerably by employer, and the match can be difficult to get for people who only stay at a company for a year or two. Here’s how to tell if your employer is providing a generous 401(k) match.
What percentage is matched? The most obvious way to evaluate a 401(k) match is by the percentage of your contributions the company matches. A 401(k) match worth 50 cents for each dollar you save is a 50 percent return on your investment. A dollar-for-dollar 401(k) match effectively doubles your money. Some employers have more complicated match formulas such as dollar-for-dollar for the first 3 percent of pay and then 50 cents per dollar on the next 2 percent of pay. A few companies even set up their matches to vary by age, job tenure or other variables chosen by the company. Often the employer stops matching your contributions once you save a specific percentage of your pay in the account, such as 6 percent of your salary.
How much do you need to save to get the match? Some employers contribute to 401(k) accounts on behalf of employees without requiring them to save anything at all. Other companies require workers to save a specific amount in order to get the match. Savings requirements can make it difficult for people who can only afford to save a limited amount to take full advantage of the 401(k) match. For example, if your employer matches 50 cents of each dollar saved for retirement up to 6 percent of pay, but you can only afford to save 3 percent of your pay, you will miss out on half of the 401(k) match you could have gotten. Many new employees are automatically enrolled in 401(k) plans, typically at 3 percent of pay. Sticking with the default savings rate could cause you to miss out of part of your employer match.
Is there a match cap? Some employers set a maximum amount of money they will contribute to a 401(k) for a single employee. For example, an employer might stop providing a match once you hit $2,000 in employer matching funds in a single year.
How soon does the match start? Most 401(k) plans begin providing a 401(k) match as soon as you start saving in the plan. However, some companies have waiting periods of up to a year before they will match employee contributions to the 401(k) plan.
When do you get to keep the match? You don’t get to keep company contributions to your 401(k)account until you are vested in the plan. Some employers immediately vest workers in the 401(k) plan, while others require a specific number of years of service with the company, such as two or three years, before you get to keep any of the 401(k) match if you leave the job. In this case, people who switch jobs within a year or two won’t get to keep any of the 401(k) match. Other employers allow you to keep a percentage of the employer contributions based on your years of service. For example, if you become 20 percent vested in the 401(k) plan for each year of service and you leave the job after two years you will get to keep 40 percent of the company contributions to your 401(k) plan. You always get to keep your own contributions to the retirement account.