If you want to get the most out of your employer match, you have to understand the factors that influence it.
A 401(k) match is a flashy perk employers dangle in front of prospective employees, but its actual value varies quite a bit: anywhere from nothing to tens of thousands of dollars.
To find out how much you'll get, you have to weigh several factors, which I outline below. Once you understand these basics, you can leverage this information to secure an even larger company match.
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What influences your 401(k) match?
The following factors affect how much your 401(k) match is worth:
- How much you earn.
- Your 401(k)'s matching structure.
- How much you contribute.
- Your vesting schedule and length of employment with the company.
- How long your money remains invested.
We'll look at each of these factors in detail below.
Your income
Those who earn more money typically receive larger 401(k) matches because the matching system is usually based on a percentage of an employee's annual income.
But 401(k) matches stop growing once a person's income exceeds $290,000 in 2021. This is the maximum income the government allows plan administrators to take into account when determining how much employees and employers may contribute.
The 401(k)'s matching structure
The median 401(k) match is 4% of the employee's pay, according to Vanguard, but every company's system is different. Some offer dollar-for-dollar matches, where your employer contributes a dollar for every dollar you put in, up to the maximum contribution percentage. Others match $0.50 for every dollar you put in.
The matching structure and the percentage of pay the company matches have a significant effect on how much you receive overall. For example, if you earn $50,000 per year and your company matches up to 4% of your pay dollar for dollar, you'd get up to $2,000 in employer-matched funds per year. With a $0.50-on-the-dollar match up to 4% of your pay, you'd only get a maximum of $1,000 per year.
Your contributions
Most employers won't contribute any money to their employees' 401(k)s unless the employees contribute themselves. Ideally, you should set aside at least enough to claim your full match every year because if you don't, that money is gone forever.
This isn't easy for everyone, though. If you're struggling to save for retirement, you might have to reevaluate your budget or look for alternative ways to increase your income, like switching employers, so you can afford to claim your match.
The 401(k)'s vesting schedule
You're always allowed to keep the contributions you make to your 401(k). Unfortunately, many 401(k)s have vesting schedules that determine when you're allowed to keep employer-matched funds if you quit working for the company. There are two main types of vesting schedules: cliff and graded.
Cliff vesting schedules require you to work for the company for a certain number of years before you can keep any of your employer-matched funds. Quitting earlier means you forfeit all the matching contributions you've ever received. The maximum cliff-vesting schedule is three years, but some companies allow vesting after one or two years, and a few offer immediate vesting.
Graded vesting schedules release your matching funds to you gradually over time. For example, with a four-year graded vesting schedule, you can keep 25% of your employer match if you leave the company after one year, 50% after two years, and so on. The maximum graded vesting schedule is six years, but again, many employers allow full vesting sooner than this.
It's important to understand how your company's vesting schedule could affect you if you're considering leaving your job. Whenever possible, try to stick it out until you're fully vested to avoid forfeiting your match.
How long your money remains invested
The longer your money remains invested, the more it will be worth, assuming you've invested wisely. Returning to our example of a $2,000 annual 401(k) match from above, if you earned that match every year for a decade and your investments had a 7% average annual rate of return, your matching contributions alone would be worth close to $29,000 after 10 years.
If you claimed your match every year and let it grow for 30 years, your matching contributions would be worth over $196,000, all other factors being the same. And that's not counting any money that you personally contributed in order to get the match in the first place. If it was a dollar-for-dollar match, your personal contributions would at least equal your matching contributions, which means your 401(k) would be worth double the estimates above. Those who contributed more than the amount required to max out their match could have even more.
So how much is your match actually worth?
If any of the above information is news to you, it might be a good idea to investigate your 401(k) match a little further. Talk to your company's human resources department or your 401(k)'s plan administrator to learn more about your company's matching system and how to get the most out of it.
