Average 401(k) Match: What You Need to Know

In this article, we’ll dive into a topic that can make a significant difference in many Americans’ retirement planning: the average 401(k) match. The 401(k) is a standard employee-sponsored savings account, but a surprising number of 401(k) owners don’t utilize this retirement account to its full potential — even if their employer offers matching contributions.

Here, we’ll discuss the average 401(k) match as well as the details around how matching contributions can differ from employer to employer.

Understanding 401(k) Match Types

Employer matching 401(k) contributions occur when employers contribute a certain amount to an employee’s 401(k) account based on how much the employee contributes (hence the term “matching”). There are various types of matches: partial matches, dollar-for-dollar matches, and non-matching contributions.

Contributions to traditional 401(k) plans are made pre-tax, which lowers your taxable income for the year in which you contribute. Withdrawals from traditional 401(k) plans are typically subject to income tax, which, if not managed carefully, can meaningfully increase your annual taxable income in the years you take money out.

If you’re working with an after-tax Roth 401(k) account, on the other hand, you’ll see the same mechanics in reverse: you pay tax upfront when you first contribute to the account, and then you’ll likely be able to make withdrawals tax-free in retirement (so long as you’ve had the Roth account open for a certain period of time, generally five years).

For more on matching contributions, see our article “401(k) Match: What is it and how does it work?”

You might also want to see how the latest SECURE Act 2.0 will affect 401(k) savings.

Analyzing the Average 401(k) Match

The average employer typically matches a percentage of the employee’s salary as part of their benefits package. These percentages can vary based on numerous factors, such as the company size, the industry sector, or economic conditions.

As an example, your employer might match 401(k) contributions up to 4% of your annual salary. If you’re an employee earning $100,000 annually, you’ll lock in a $4,000 match if you can also contribute at least $4,000 over the course of the year.

According to the Bureau of Labor Statistics, employers are beginning to catch on. Recent studies have shown that 41% of employers that offer 401(k) retirement accounts provide employer-matching contributions up to 6% of employees’ salaries. Only 10% of employers offer a company match greater than 6%.

Benefits of Participating in an Employer-Matched 401(k) Plan

Enrolling in an employer-matched 401(k) plan is a major perk and a valuable employee benefit. Why? Well, for starters, it’s a straightforward way to maximize your retirement savings. Not only does it encourage you to save for retirement, but you also enjoy tax advantages by deferring pre-tax income (generally speaking, retirees pay income taxes on their 401(k) savings at the time of withdrawal).

Employer contributions to employee 401(k) plans are also considered “free money” in that you don’t have to do anything other than contribute on your own to receive them. You’ll often see employer matching programs as part of your overall compensation and benefits package.

In most cases, it is advised that employees take up their employers on matching contributions if given the opportunity — even if they only plan to be at that particular job for a short time and need to later roll over that 401(k) into another, active retirement account (like an IRA).

401(k) Eligibility

There are eligibility criteria for participating in a 401(k) plan. These can vary by employer, with some offering immediate participation, while others may have a waiting period of up to one year.

Some companies might also have automatic enrollment options.

Annual Limits on 401(k) Deferrals and Matching

Remember, the Internal Revenue Service (IRS) sets annual contribution limits on employee deferrals to 401(k) plans, as well as on matching contributions. These annual limits tend to change annually, so it’s key to continuously refer to the IRS website on a regular basis to see what’s currently permitted.

The maximum amount you can contribute, the catch-up contribution limits for those aged 50 or older, and the combined limits on employee and employer contributions — all these are vital for you to understand to make the most out of your employer-sponsored 401(k) plan.

For more information on annual 401(k) limits, see our other articles:

• 401(k) Contribution Limits 2023
• Should you contribute to your 401(k) without an employer match?

Making the Most of Your Employer’s 401(k) Match

So, understanding how 401(k)s work, how can you make the most of your employer’s 401(k) match?

First off, it’s essential to understand your employer’s matching policy, including the match percentage and the vesting period (the period of time that must elapse before you are entitled to take employer contributions with you if you were to leave the company.

In many cases, it’s advantageous for the employees to pursue maximum employee contributions, since it requires little extra effort but can do a lot to supercharge your retirement savings account balance.

Next, you’ll want to keep an eye on your 401(k) investments. You’ll want to be sure that your 401(k) investments (like mutual funds and company stock) incorporate your employer contributions as part of the bigger whole. Just remember to rebalance your portfolio as necessary, and let time take care of the rest.

If this feels overwhelming, don’t worry! An experienced financial advisor can help.

If you’re looking to roll over an old 401(k) into an active retirement savings account, Capitalize can help.

Get in touch with our team today.

FAQs

What Is a Partial 401(k) Match?

A partial 401(k) match is when your employer matches a part of what you contribute to your 401(k) account. This matching amount varies, but it typically means that your employer will match a certain percentage of each dollar you contribute and up to a certain maximum.

What Is Dollar-for-Dollar Matching?

Dollar-for-dollar matching is exactly what it sounds like. For every dollar you contribute to your 401(k), your employer will contribute the same amount, up to a limit (sometimes called “full match”). This type of matching arrangement can significantly boost your retirement savings.

What Are Non-Matching 401(k) Contributions?

Non-matching 401(k) contributions, also known as nonelective contributions, are contributions your employer makes to your 401(k) without you having to contribute anything. These types of contributions differ from other matching contributions, as they are not contingent on your own contributions.

Nonelective contributions are common in SIMPLE retirement plans.

In Summary

401(k) matches are varied and can be complex — especially if you are a new employee starting at a new job and want to make sure you get the most out of your employee benefits package. Even before getting hired, it is reasonable to ask what a prospective employer offers for its match program, learn about the vesting schedule, and seek investment advice once you become enrolled.

And remember, old 401(k) accounts that are no longer receiving contributions from you or an employer can better serve when consolidated with a traditional or Roth IRA.

Contact us at Capitalize to learn how we can help find and consolidate your retirement savings with our rollover services.