Your Employer’s 401k Match is Not a Suggestion (or Maximum)




So, you have a 401K. Congratulations! (many don’t)

What’s next? You have to decide how much you would like to contribute, of course. And this crucial stage is where I fear that many people get tripped up.

Many employers with a 401K plan offer a match. And it seems natural that many employees will look at that matching percentage as a suggestion. Or worse, a maximum.

employer 401k matchAccording to the Bureau of Labor Statistics, the average 401K match nets out to 3.57%. In their most recent National Compensation Survey, they found that of the 61% of employers that actually do offer a 401K plan:

  • 49% match 0%
  • 41% match a percentage of employee contributions between 0-6% of salary.
  • 10% match a percentage of employee contributions at 6% or more of salary.
  • The median match is a 3%.

In other words, much more than half of the working population gets zero 401K match. And for the minority that do, the median 401K match is a paltry 3%… who says Social Security isn’t a necessity?

A 3% match on a salary of $1M might be pretty sweet. Unfortunately, the median household income in the United States was $61,372 at last check. So, the median household 401K match (for those “lucky” enough to get one at all) is about $1,841.

Now, let’s assume you’re lucky enough to have a 401K. AND you’re even luckier and get a 401K match of $1,841 on your own $1,841 contribution. AND you’re lucky enough to get that every year for the next 30 years. AND you invest it wisely enough to average a 7% return. AND inflation is only at 2% per year. AND you don’t raid the balance at any point along the way. AND hidden 401K fees don’t raid the balance either. How much would you have?

About $372,000.




That’s a lot that has to go right to get to that amount. Maybe $372,000 doesn’t sound so bad (and it’s certainly far better than the horrific median retirement account savings of $12,000 for those nearing retirement age), but do you think it’s enough to base a retirement on? Particularly one without pensions and with the threat of Social Security benefit decreases?

I don’t.

Here’s the thing: your employer’s 401K match is not a suggestion. 401K matches are set based off of the labor market more than anything else. Employers want to attract and retain talent, and in order to do so, they need to have a total compensation package that is competitive with similar competing employers. And that total compensation package may include a 401K (or it may not, since the labor market is weak on this benefit). The bar is set pretty low. How much you NEED to retire is something that you will need to calculate on your own, and is entirely separate from employer 401K matching levels.

You should also not view your employer’s 401K match as a maximum contribution that you should not go beyond. For anyone who can afford it, I highly recommend blowing past your employer’s 401K match and trying to reach the federally allowed maximum 401K contribution – an amount that is far beyond what 99.99%+ of employer 401K matching will ever reach (although the maximum employer 401K contribution is significantly higher than the employee contribution). And if you can’t afford it now, it’s something to strive for. Just ignore the 401K match and save as much as you possibly can.

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