What is a 401(k) Match?

A 401(k) match is the amount an employer contributes in addition to the contribution made by an employee. The most common employers match is 50% up to 6% of an employee’s salary. For example:

Employee Salary: $100,000.00
Employer Match: 50% up to 6% of Salary

Employee contributes 6% of their salary or, $6,000. Then, the employer will add 50% on top of what the employee contributed or, $3,000. This match is the equivalent of getting a guaranteed 50% return on your investment. Considering the average annual return of the S&P 500 is 7.9% and not guaranteed, that’s one heck of a deal.

In this scenario by taking advantage of an employer’s 401(k) match, the employee increased their total compensation package by $3,000, effectively increasing their salary to $103,000, without having to work more days, hours, or lifting a finger.

It’s important to note that “up to 6% of Salary” is the max. So if the employee contributes say $7,000, they will still only get from their employer $3,000. To increase the dollar amount of what an employer will add, an employee’s base salary would have to increase. Also, if an employee contributes less than $6,000, they employer will only add 50% of that lower amount. Therefore it is in the best interest of the employee to max their 401(k) match otherwise walk away from the guaranteed return, aka free money.

Why it matters: Taking advantage of your employer’s maximum 401(k) match you’re incentivized to save more for retirement by increasing the total value of your earnings.

Key Takeaways:

• A 401(k) match are the additional contributions made by employers on top of contributions made by employees.

• A 401(k) match is a risk-free guaranteed return on an investment - aka free money.

• Contributing anything less than your employer’s maximum match is the equivalent of leaving free money on the table.