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What Is a 401(k) Employer Match?

| MoneyRates.com Senior Financial Analyst, CFA
min read

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HIGHLIGHTS
  • An employer match makes a significant difference in retirement savings over time
  • Only 5% of all 401(k) plans do not provide an employer match
  • 65% of 401(k) plan participants contribute at least enough to qualify for the maximum employer match available

Not all 401(k) plans are the same, so how can you tell if you have a good one?

There are a number of features that make a difference in the quality of 401(k) plans - everything from investment menus to fees to retirement planning tools.

However, no element of a 401(k) plan makes as much of an immediate difference as the employer contribution.

The employer contribution is the amount of money your employer puts into the plan on your behalf. In some cases, the employer contributes nothing; in other cases, employer contributions are fairly generous. The following discussion will help you evaluate how generous your 401(k) plan is and how this should affect your participation in the plan.

Employer Contributions to 401(k) Plans - How Do They Work?

In general, 401(k) plans depend primarily on money put into them by the workers themselves. You can choose to defer a portion of your wages to the plan, up to certain limits.

In return, you receive an immediate tax deduction plus tax-free investment growth, though you will ultimately have to pay taxes on the money when you withdraw it from the plan in retirement.

Matching and non-matching contributions

Employer contributions sweeten the pot. This is money your employer kicks in to the 401(k) plan on your behalf. These contributions can be either matching or non-matching.

A non-matching contribution means that the employer contributes to your 401(k) balance whether or not you direct any of your wages into the plan.

A matching contribution means that the employer only contributes some portion of what you put into the plan. The employer contribution is based on a percentage of your contribution. These matches are often capped, meaning they only apply up to a certain amount of your salary.

Example: Suppose you make $50,000 a year and your employer offers a 50% match on contributions up to 5% of your salary.

If you choose to direct 4% of your paycheck, or $2,000 a year of your $50,000 income, your employer will kick in half as much on top of your contribution -- 2%, or $1,000 a year.

However, in this example, if you directed 6% of your paycheck into the plan, the employer would only give you a 50% match on 5% of your pay, because of the 5% cap on matching contributions.

So, in this instance, your contribution would be 6% of your $50,000 income (or $3,000). The employer match would be half of the 5% maximum eligible for matching contributions. That would be 2.5% of your $50,000 income (or $1,250).

The table below shows how various levels of employee contributions would affect the employer match in a situation where the employer matched half the employee contribution up to a maximum of a 5% contribution.

Annual SalaryEmployee Contribution %Employee ContributionEmployer match %Employer match Combined Contribution
$ 50,0001%$ 50050%$ 250$ 750
$ 50,0002%$ 1,00050%$ 500$ 1,500
$ 50,0003%$ 1,50050%$ 750$ 2,250
$ 50,0004%$ 2,00050%$ 1,000$ 3,000
$ 50,0005%$ 2,50050%$ 1,250$ 3,750
$ 50,0006%$ 3,00050%$ 1,250$ 4,250
$ 50,0007%$ 3,50050%$ 1,250$ 4,750
$ 50,0008%$ 4,00050%$ 1,250$ 5,250

Moneyrates-chart

Do Most Employers Match 401(k) Contributions?

There are several variables to look at when trying to figure out whether or not a 401(k) plan is generous:

  • Is the employer contributing anything?
  • Is it a matching or a non-matching contribution?
  • How much of your contribution is matched?
  • Is the match capped?

Start with perhaps the simplest question: Should you expect your employer to contribute anything?

The answer is yes.

According to Vanguard (a prominent 401(k) plan provider), 51% of all plans provide just matching contributions and another 34% provide both matching and non-matching contributions.

In the latter scenario, the employer will contribute something on your behalf no matter what - but you can increase that contribution if you direct some of your paycheck into the 401(k) plan to earn a match as well.

In total, 85% of 401(k) plans provide some form of matching contributions. Another 10% of plans provide just non-matching contributions.

What all this adds up to is that only 5% of 401(k) plans provide no form of employer contribution. If you are in one of those, you are in one of the least generous 401(k) plans around.

What is a Good 401(k) Match?

If your employer makes non-matching contributions, you are really ahead of the game - that's extra money you get as long as you are eligible for the plan.

When it comes to matching contributions, though, the amount you get out of your employer depends on how much you put into the plan.

So what's a good 401(k) matching contribution?

There are many varieties of matching formulas out there, plus some employers kick in non-matching contributions as well. A common matching formula is for employers to contribute 50 cents for every dollar the employee puts into the plan, usually up to a certain maximum.

According to Vanguard, the most common matching formula is 50% of the first 6% of salary an employee contributes. However, many matching formulas are more generous than that, both in terms of the size of the match and the level of the cap.

One way to look at this (to measure how much a 401(k) plan participant can get out of their employer) is to ask how much that participant has to put into the plan to get maximum employer contributions.

According to Vanguard, the average value of the maximum potential employer contribution is 4.3%. The average a 401(k) participant has to contribute to get the maximum employer match is 7.4% of wages.

Based on all these figures, if your employer provides a match of more than 50% or a maximum potential contribution of more than 4.3% of your wages, you should consider yourself to have a pretty generous 401(k) plan.

Why an Employer Match is So Important

The details of employer matching programs make a difference.

Consider two employees: Jane and Jack. Each makes $50,000 and contributes 6% of that annually to their company 401(k) plan. They each earn similar investment returns of 5% a year. However, Jane's employer has a 50% match, while Jack's has none.

At the end of 20 years, Jane would have accumulated $152,517 in her 401(k) plan and Jack's balance would be worth $50,839 less, at $101,678.

Remember, both of them contributed the same annual amounts and earned the same investment returns, but the existence of an employer match made a significant difference in their retirement savings.

How This Should Impact Your 401(k) Deferral Strategy

The purpose of an employer match is to get employees to contribute to their 401(k) plans. Vanguard's figures suggest this is fairly successful -- 65% of 401(k) plan participants contribute at least enough to qualify for the maximum employer match available from their plans.

The flip side, though, is that this means over one-third of plan participants are not contributing enough to maximize the money they could be getting from their employers.

How to take full advantage of a 401(k) match and build retirement savings:

  1. Contribute enough to qualify for your employer's maximum match

    Your minimum goal as a 401(k) plan participant should be to make sure you don't leave any employer dollars on the table. Find out what the maximum employer match on your plan is, and make sure you contribute enough to qualify for that match.

  2. Reach the maximum contribution allowed per year (2020: $19,500, under age 50 / $26,000, age 50 and above)

    Beyond that, though, there would most likely still be tax advantages and retirement saving benefits to be had by contributing more than you need to qualify for the full employer match. According to Vanguard, 47% of employees do this, making contributions that go beyond what is necessary to qualify for the full employer match available.

    In most cases, you can contribute up to $19,500 to a 401(k) plan for 2020 (and up to $26,000 if you are aged 50 or older). Chances are this is well above what you need to contribute to maximize your employer match, but your goal should be to come as close to this limit as possible. Doing so will enhance your tax savings and build your retirement nest egg more quickly -- and your employer match should help as well.

Finally, remember that your 401(k) plan is not your only option for retirement savings.

If you reach the IRS maximum for 401(k) contributions, there are still other ways - from health savings accounts to after-tax savings - that you can build a bigger nest egg.


Glossary:

TermDefinition
Employer contributionThe amount of money your employer puts into the plan on your behalf.
Non-matching contributionA non-matching contribution means that the employer contributes to your 401(k) balance whether or not you direct any of your wages into the plan.
Matching contributionThe employer only contributes some portion of what you put into the plan.

The employer contribution is based on a percentage of your contribution, and these matches are often capped (meaning that they only apply up to a certain amount of your salary).

More resources on saving for retirement:

Starting your career? How to start a retirement fund in your 20s

Health or wealth: juggling HSA and 401(k) contributions

How to use a health savings account to build retirement wealth

Financial checklist: How to invest in your 20s

Retirement Savings Calculator

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