A 401(k) match can be a powerful tool for building retirment savings. Why do people walk away?
A 401(k) match is essentially free money offered by an employer, but many employees miss out on this valuable opportunity to build their retirement savings.
Employer-sponsored retirement plans known as 401(k) plans account for the largest share of retirement savings in the United States, replacing more traditional pension plans. The plans are funded with employee contributions, typically deducted from paychecks, and are allowed to grow tax-free. Many employers provide an additional 401(k) match, allowing workers to build an even larger retirement fund.
“Millions of workers are leaving money – free money – on the table,” reports the Financial Industry Regulatory Authority, a non-governmental regulatory agency, which issued a recent investor alert because “too few workers are taking advantage of a simple benefit that can help them meet their retirement goals.”
Nearly three in 10 workers do not contribute enough to their 401(k) to receive the full employer match, said FINRA. The workers who need it the most – younger and lower income workers – are the most likely to miss out on the benefit. Forty-three percent of workers ages 20 to 29 fail to maximize their employer’s match, as do 40 percent of employees who make less that $40,000 a year and may be having difficulty paying daily expenses.
“Even in tough economic times, all employees still need to prepare for their retirement,” said Gerri Walsh, vice president for investor education at FINRA. “Taking full advantage of a company’s 401(k) match is a no-cost way for workers to boost their retirement savings. Employees who contribute less than their employers are willing to match are walking away from free money.”
A common 401(k) match is a dollar-to-dollar match of up to 3 percent of an employee’s salary, said FINRA. The benefit can add “a substantial amount to an employer’s nest egg.” A 30-year-old making $40,000 a year and annually contributing 3 percent of his or her salary to a 401(k) will have put in $42,000 by the age of 65. A dollar-for-dollar 401(k) match will literally doubt the amount to $84,000. Investment gains can augment the account, but a 401(k) can also lose money.
Employer-sponsored retirement plans offer additional benefits, said FINRA. In a traditional plan contributions are made with pre-tax dollars and grow tax-free. A 401(k) contribution reduces the amount of taxable income, and the resulting tax savings can help offset the amount of money set aside for retirement.
A 401(k) match can help reduce the risk of running out of money in retirement, may be not go far enough. Most investment professionals recommend a retirement savings rate of 10 percent or more, and urge employees to begin saving with their first job.