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There are few certainties when it comes to investing.
It seems like the stock market goes around with little rhyme or reason, led up or down by unpredictable news cycles and fickle investor sentiment. Average stock returns have historically trended upward over long periods of time, but their trajectory is hardly assured on a daily, monthly or annual basis. As the usual investment disclosure goes, “Past performance is no guarantee of future results.”
Yet, according to financial advisors, there is an outlier in the field of investing: the 401(k) match.
The basic concept of a 401(k) match is that an employer makes an appropriate contribution to employees’ retirement savings, up to a maximum. Advisors often call a competition free money.
For example, if an employee contributes 3% or more of their annual salary to a 401(k) plan, the employer can add another 3% to the employee’s account.
In this example – a dollar-for-dollar match of up to 3% – the investor would double his money, the equivalent of a 100% gain.
A match is “one of the rare guarantees of an investment that we have,” says Kamila Elliott, a certified financial planner and co-founder of Collective Wealth Partners, based in Atlanta.
“If you were in Vegas and every time you put in $1 [the slot machine] If you got $2 out, you’d probably be on that slot machine for a very long time,” said Elliott, a CNBC Advisory Board member.
However, that money can meet certain requirements, such as an employee’s minimum working hours, more formally known as a “vesting” schedule.
Most 401(k) plans have a match
About 80% of 401(k) plans offer matching contributions, according to a 2023 survey by the Plan Sponsor Council of America.
Employers can use different formulas that determine what their respective employees will receive.
The most common formula is a match of 50 cents for every dollar an employee contributes, up to a maximum of 6%, according to the PSCA. In other words, an employee who saves 6% of their paycheck will get another 3% in the form of a company match, for a total of 9% in their 401(k).
“Where else can you get a guaranteed return of more than 50% on an investment? Nowhere,” according to to Vanguard, a 401(k) administrator and money manager.
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To consider this example of the value of an employer match, from financial firm Empower: Let’s say there are two employees, each with an annual salary of $65,000, who are eligible for a dollar-for-dollar employer 401(k) match of up to 5% of the wage.
One person contributes 2% to their 401(k), making him or her eligible for a partial match, while the other saves 5% and gets the full match. The former employee would have saved approximately $433,000 after 40 years. The latter is said to have savings of approximately $1.1 million. (This example assumes an average annual investment return of 6%.)
Financial advisors generally recommend that people who have access to a 401(k) save at least 15% of their annual salary, taking into account contributions from both employees and companies.
However, keeping the match is not guaranteed
However, this so-called free money may come with some conditions.
For example, so-called “vesting” requirements can mean employees have to stay with a company for a few years before the money is completely theirs.
According to the PSCA, approximately 60% of companies require a tenure of two to six years before they can exit with their full match intact. Employees who leave before that period may forfeit all or part of their match.
The rest have “immediate” vesting, meaning no such restriction exists. The money is theirs immediately.