What Is a Good 401K Match?
It is fiscally smart and financially rewarding to invest in your company’s401K plan. 401K contributors have most likely pondered how their 401K compares with other company plans. For example, are you missing out on a free retirement contribution match because you’re not working for the company down the road? To help us find the answer, we looked at the most recent 401K benchmarking data.
What Is a Good 401K Match?
The majority of companies offer some sort of matching contribution for an average of 2.7% of a person’s pay, but there are many formulas out there. The most common match was 50 cents on the dollar. For every $1 you contribute to your company 401K, your company will contribute 50 cents. About 40% of companies contribute 50 cents for every dollar employees contribute up to 6% of their pay. Another 38% match employee 401K contributions dollar for dollar, but the maximum is normally lower – commonly 3%².
Employers don’t match an unlimited amount. In other words, you can’t contribute half of your salary and watch your company match all of those funds into your 401K retirement account.
Although the maximum amount the company could pay the employee is the same with each of those plans, under the most common option the employee has to contribute more to get the maximum company match. Depending on the quality of the 401K plan, that could work to the disadvantage of the employee, because he or she could be forced into less-than-stellar investment vehicles with high management fees.
Managing Your 401K Plan
In fact, most 401K plans now offer a wide range of investment choices in an average of 25 funds¹,most of which are actively managed domestic and international stock funds. The next most common are domestic index funds. The more options available to you, the better your chances of finding a well-performing option with low fees. You should never turn down free money as long as most of it is remaining in your account.
What good is a match if you don’t have the knowledge and experience to invest the money into the best funds in your plans? About 44% of plans had somebody who would offer investment advice to their participants, but only about 18%of the employees put the advice they received into action³.
An increasing amount of plans are offering aself-directed option, although it’s still only 28%¹. A self-directed plan allows you to manage your account on your own, similar to a more traditional brokerage account. You could get the help of an independent advisor, or, if you have a larger than average amount of investing knowledge, you could do it yourself. The advantage is that instead of having 19 investing options you have thousands, including individual stocks and bonds that don’t come with all the management fees of mutual funds.
