Usually it’s not a good idea to take a bribe, however, when your employer is offering to match your contribution to a 401(k) plan, it’s a bribe you can’t afford to pass up. If you’re not familiar with how an employer match works, see the Q&A below.
What is an employer match?
The employer match is exactly what it sounds like – your employer will contribute the same amount as you do to your company’s 401(k) plan, usually up to a specified percentage. For example, a typical program might match 100% of an employee’s contributions, up to a maximum of 3% of pay. Not every employer offers a match, so it makes sense to get clarification on the specifics of your plan from your HR dept.
Why would your company offer a match?
Highly compensated members of a plan obviously want to defer as much of their income as possible. In order for them to do this, the Department of Labor has established non-discrimination testing requirements to ensure that highly-compensated employees aren’t benefitting more than the “rank and file.” An employer match helps businesses to comply with DOL requirements by incentivizing all employees to participate in the plan.
How does the match work?
Let’s use the example above, where an employer matches 100% of your contribution up to 3% of pay. An employee making $50,000/year and contributing 3% of pay will salt away $1,500. The employer will match your contribution with another $1,500. That’s a 100% guaranteed return on your money! Anything you earn on your contribution is gravy above and beyond the 100% you earned on the match.
Should you stop contributing once you have maxed out your match?
Many employees incorrectly believe that contributing to max out the match will provide them with a comfortable retirement. Nothing could be further from the truth. Never confuse anti-discrimination incentives with what you need to save for your future. Ideally, we suggest regularly contributing 15% of pay toward your retirement, during good and bad markets.