How to Maximize Your 401(k) Match

 Emily Brandon

Many companies offer a 401(k) match to employees who save for retirement, but it's not always easy to qualify for the match and take it with you when you leave the job. There might be waiting periods before you are eligible for a 401(k) match and vesting schedules that prevent you from keeping the match if you don't stay at that job for a specific period of time. Here's how to take advantage of 401(k) matching contributions.

Find a job with a good 401(k) match. Consider the 401(k) match when making job change decisions. A 401(k) match is part of your compensation package and should be factored into job offers. The highest 401(k) matches tend to be paid out by large companies with over 100 employees, according to Bureau of Labor statistics data. The industry you work in also plays a role, with management and professional positions generally paying out the biggest employer contributions. Jobs in the service sector are the least likely to provide a 401(k) and typically provide only a small match if one is offered at all. "Retail tends to be on the lower end because there is a lot of turnover," says Gregg Levinson, a senior retirement consultant for Willis Towers Watson. "They might have a long wait before you can actually get the match." The most common 401(k) match is 3 percent of pay, but some employers don't match at all, while others will give employees up to 10 percent of pay or more for retirement.

Set up automatic 401(k) withholding. The best way to take advantage of a 401(k) match is to set up payroll withholding. If your employer will match up to 6 percent of your salary, make sure to redirect at least 6 percent of your paycheck to the 401(k) plan. Once you enroll in the 401(k) plan and set your savings rate, you should automatically qualify for employer contributions. As your salary grows, the dollar value of your withholding and the employer contributions will also automatically increase. Saving more than the amount your employer will match won't make you eligible for extra contributions, but might qualify you for an additional tax break. The money you contribute to a traditional 401(k) isn't taxed until it is withdrawn from the account.

Watch out for 401(k) waiting periods. Most employers allow you to begin participating in a 401(k) plan with your first paycheck. However, some employers impose a waiting period before you qualify for the match. Just under over a quarter (29 percent) of 401(k) plans require a year of service before they will match employee 401(k) contributions, and a three-month wait is also common (15 percent), according to a Plan Sponsor Council of America survey of nearly 600 401(k) and profit-sharing plans. Saving in the 401(k) before you are eligible for the match will allow you to defer paying income tax on your retirement savings and make it so you don't forget to enroll in the 401(k) plan later when you do qualify for the match. "A lot of companies will let you start deferring salary on day one, and if you are already deferring salary that match will kick in," Levinson says. However, if you do wait to start saving in the plan, make a note of when you will qualify for the match so you remember to sign up later.

Follow the 401(k) match rules. 401(k) contributions are matched according to a specific formula that varies by employer. The most common employer match is 50 cents per dollar saved up to 6 percent of pay. However, more generous dollar per dollar 401(k) matches are also popular. Pay attention to how much you need to save to get the full match. Your employer might provide a maximum possible match of 3 percent of pay, but you might need to save 6 percent of your salary in order to get the full match. "They can have from 25 cents on the dollar up to 6 percent [of pay] to dollar for dollar up to 6 percent of pay," says Hattie Greenan, director of research and communications for the Plan Sponsor Council of America. "They might match 50 cents on the dollar up to a certain percentage and then 25 cents on the dollar for a certain amount over that. There is a wide variety and companies can customize their 401(k) contributions."

Don't stick with the 401(k) default contribution. Many companies automatically enroll new employees in the 401(k) plan unless they opt out. The typical default savings rate for those who are automatically enrolled in the plan is 3 percent of pay. However, if you stick with the 3 percent default savings rate, but your employer will match up to 6 percent of pay, you could miss out on half of the 401(k) match you are eligible for. If you are automatically enrolled in a 401(k) plan, compare your contribution rate to the proportion of your salary your employer will match, and remember to adjust your withholding accordingly. "A lot of companies will automatically enroll at the minimum of 3 percent, and they will have a stretch match of up to 6 percent," Levinson says. "To get to the full match you have to choose to do it or wait to be auto-escalated up to that max of 6 percent."

Many people will need to save more than the matched amount to accumulate enough money for retirement. "When employers offer a match, most of the employees limit their contributions to that match. Don't fall into that trap," says Lavina Nagar, a certified financial planner and president of Maya Advisors in Palo Alto, California. "You should not limit your contribution to the match offered by your employer, because in the long run all of us need to save more for retirement."

Pay attention to the 401(k) vesting schedule. You don't get to keep your employer's contributions to your 401(k) account until you are vested in the plan. Just under half (45 percent) of companies have immediate vesting, while other plans (30 percent) require as long as five or six years on the job before you get to keep the entire 401(k) match, according to Vanguard 401(k) plan data. If you leave before you are fully vested, some employers allow you to keep a portion of the employer contribution based on your years of service, while others require you to forfeit the entire 401(k) match if you leave too soon. "A two-year cliff vesting would mean that you are not vested at all until two years of service, and then you are 100 percent vested," Greenan says. "With the graduated vesting you earn a certain percentage over time, which might mean 20 percent a year." Some companies (20 percent) also require 401(k) participants to be employed on the last day of the plan year to receive the company matching contribution, PSCA found.

Sticking around long enough to vest in your 401(k) plan could get you thousands of extra dollars for retirement, but there are also times when a new job offer is too good to pass up. "If you are leaving money that was contributed by your employer and you do not have access to it, you can use that as a negotiating tool for the next position," Nagar says.

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