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Who doesn’t want a little extra ‘free’ money in their retirement accounts? With an employer match, it’s possible.
Retirement Tip of the Week: Not all companies offer retirement plans, or plans with employer-matching contributions, but it’s still worth looking into. If you have an employer-sponsored retirement account, such as a 401(k) or 403(b), ask your company’s human resources department if there is a company match — then make sure you’re contributing at least as much as you need to take advantage of it.
With an employer match, the company is contributing up to a percentage of what the employee puts into her employer-sponsored retirement plan. For example, if a company’s policy is to match up to 5%, the employee must be contributing 5% or more to get the full match. If that same individual only deferred 3% of her salary to her 401(k), the company would contribute 3%.
Not everyone has the ability to defer a portion of their salary into a retirement plan. There are financial obligations that can stand in the way of retirement saving, including buying a home, starting a family or building a business. Some financial advisers recommend workers contribute somewhere between 10-15% of their salaries to their 401(k) plans, but if that’s not possible — which it isn’t for many Americans — the follow-up advice is usually to at least meet the employer match. The average employer match was estimated to be 4.5% in 2019, according to Vanguard’s 2020 How America Saves report.
The employer match isn’t seamless. Workers don’t get to immediately pocket that money.
First, the employer contribution can’t be touched until the money is withdrawn from the account, which has its own restrictions (many plans have an age requirement of 59 ½ years old to withdraw money without any penalty fees).
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Second, the money must be “vested,” which typically happens after a set amount of years on the job. For example, if a company has a five-year vesting schedule, an employee must be there five years to receive the full amount of the employer match. In comparison, employees’ contributions to their own plans are always fully vested from the start.
The pandemic impacted some employer match benefits. A few major corporations had to suspend their employer matches as a result of the coronavirus crisis, though many businesses have said they plan to restore this perk, if they haven’t already. Smaller businesses were hit especially hard, according to the Society for Human Resource Management — 11.5% of companies with fewer than 50 participants reduced or suspended their matching contributions, which is triple the number of organizations with 5,000 or more participants.
Not all employer matches are the same, either. Some are more generous than others. While employees can’t rely entirely on employer matches to have enough in savings for their retirement, it is an added bonus to having a retirement plan at work. Any little bit of money counts, especially when considering the money will grow alongside and on top of other contributions and investment returns.
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