How Employer 401(k) Matches Affect Your Retirement Savings
If you contribute to a 401(k), your employer probably does, too — but not all matches are created equal. Some companies offer a match that can increase long-term savings, while others offer little or no assistance, leaving employees to do more of the saving themselves.
A recent Acensus’s Compensation, Retirement and Benefits Trends Report found that 88% of companies offer the same, typically between 3% and 4.9% of your salary. Around 30% give more than 5%, with large organizations and certain industries – including finance, banking, insurance and manufacturing – tending to offer more generous offers than smaller employers.
Without the game, employees have to make that difference on their own, which can be dangerous in the long run.
The gap is important because most Americans build their retirement savings through workplace plans. Most of the nation’s retirement assets are accumulated through employer-sponsored plans such as 401(k)s, according to the Pew Research Center. But access isn’t available to all: About half of private sector workers — about 56 million workers — have no retirement benefits at all for their jobs.
How your system is managed can also make a difference. About 70% of companies offer professionally managed accounts, giving employees personal guidance, while just over half offer automatic enrollment – a feature required for new systems under the SECURE 2.0 Act.
Research has consistently shown that features like automatic enrollment make employees more likely to participate and consistently save. A recent Vanguard report, for example, found that programs with automatic enrollment saw participation rates of about 94%, compared to about 64% for programs without it.
That is why financial advisors say that the game should not be considered as a bonus, but as part of your income. “The game is a guaranteed return on your savings,” said Bethany Dever, vice president and relationship manager at Rockland Trust. The biggest mistake he sees is giving too little or giving inconsistently.
“Think of the game as part of your compensation,” he said. “Failure to claim it is like accepting minimum wage.”
What to do if you can’t get ahead – or can’t find a match
For workers who can’t afford a 401(k), consistency is still important. Jake Sadler, founder and senior advisor at Curio Wealth, says consistent contributions over time often beat short-term savings that are hard to maintain.
“A 401(k) works well because it’s automatic and comes out before you see the money,” Sadler says. He recommends starting with whatever contribution is needed to capture the employer’s full game and building from there, rather than trying to save as much as possible and burn out.
If your company’s game is small — or nonexistent — a 401(k) can still play an important role, but it’s not your only option. “Even without matching, the tax benefits and contribution limits make it impractical to save more for retirement,” Sadler said.
However, you may need to compare your workplace plan to an IRA, especially for employees who don’t have a 401(k) or who face high expenses or limited investment options.
Dever points to Roth IRAs as another option: Unlike a traditional IRA, which may offer a tax break up front, Roth IRA contributions are made with after-tax dollars, but the money grows tax-free and qualified retirement withdrawals are tax-free.
Both accounts offer tax benefits, but there are significant differences when you get a tax break. It’s also worth noting that Roth IRAs have income limits, and IRAs generally have lower annual contribution limits than 401(k)s, which can make workplace plans a better option for high savers.
Ultimately, a big match can give employees a head start, but saving regularly and sticking with it over time is more important. Saying this is just skipping the employer game if it’s already there means leaving money on the table.
More from Mali:
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