Thin(k) About Your 401(k) Plan: Don’t Leave Money On The Table – 401(k) Plan Matches

Many 401(k) plans sponsors offer participants a matching contribution based upon the participant’s savings.  This is a real benefit that your employer is providing to you.  But, have you taken the time to actually calculate the implication of this enhanced benefit?

A 401(k) match has two key components.  First, how is the match calculated?  Matches vary from plan to plan, but typically are calculated using a percentage of the employee’s savings.  For example, an employer might match half of the percentage an employee saves up to 6%.  So, if the employee saved 6% the employer would contribute 3%.  However, if the employee’s savings rate was only 4% the match would be 2%.  For someone earning $75,000 a year, the difference between saving 6% versus 4% would be an extra $750 in match dollars per year.

Just to be clear, in this example, the maximum match is 3% based upon a 6% savings rate, but that does not mean you should not consider saving a higher percentage if your circumstances allow.

The second key component to a match is when does it vest to you.  The vesting period is the length of time you must work for your employer before you are eligible to receive all of the match money.  Some vesting schedules are referred to as cliffs.  For example, take a three-year cliff vesting schedule.  Once you reach three years of service, all of the match money vests to you.  However, if you leave before three years, none of the match money vests to you.

Other vesting schedules are graded over a number of years.  A common example of a graded vesting schedule would be to award 20% per year of service after eligibility.  After five years of saving, you would be fully vested, and all of the match money would be yours.  However, if you left after three years, only 60% of the match money would belong to you.  If the plan offers a Safe Harbor match, the match money is yours without a vesting schedule.

One final note, your employer’s match dollars do not count against personal annual savings limit as determined by the IRS.  In 2020, you are allowed to save $19,500 of your pretax income in a 401(k) plan plus an additional $6,500 in catch-up contribution if you are over the age of 50.  The match allows you to save above these limits with a maximum amount including employer contributions of $57,000 plus the $6,500 catch-up if you are 50 or older.

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