5 Ways to Size Up Your 401(k) Match

How to tell if your employer’s 401(k) match is competitive.

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401(k) matches vary considerably from company to company. Vanguard administered more than 200 different 401(k) match formulas ranging from less than 1 percent to over 10 percent of pay in 2009, according to a new analysis of 600 Vanguard retirement accounts with 1.3 million eligible employees. How soon you become eligible for the match and how much you need to save to get the full match also play a role in how prepared you will be for retirement. Here is how to tell if your employer’s 401(k) match is competitive.

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Match eligibility. Only about half (51 percent) of Vanguard 401(k) plans allow new employees to immediately begin saving in the 401(k) plan. Other employers require between 1 and 3 months (25 percent) or even an entire year of service (15 percent) before workers are allowed to make 401(k) contributions. The waiting periods are even longer to qualify for the 401(k) match. Just 40 percent of employers immediately begin matching worker 401(k) contributions. Over a quarter (28 percent) of companies require workers to have a year on the job before they will provide a 401(k) match.

Match amount. Another way to evaluate your 401(k) plan is by the maximum possible match you could potentially earn. The median 401(k) plan promises a maximum match of 3 percent of pay, with just over a third (36 percent) of 401(k) plans matching this exact amount. Two-thirds of 401(k) plans match between 3 and 6 percent of pay.

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Savings required to get the full match. Getting the 401(k) match typically requires you to save a certain amount. The median 401(k) plan requires workers to save 6 percent of pay to receive the full 401(k) match. Two-thirds of plans require participants to contribute between 4 and 7 percent of their pay to receive the maximum matching contribution.

Match formula. The 401(k) match formula can be particularly important to people who are only able to save a small amount annually for retirement. Three quarters of companies use a fixed match formula such as 50 cents for each dollar the employee contributes up to 6 percent of pay. An employee paid $50,000 annually at a company using this formula would need to save $3,000 to get the maximum possible match of $1,500. Some 22 percent of companies used this exact match formula in 2009, which was the most common of any type of 401(k) match.

Another 17 percent of 401(k) plans use tiered match formulas, such as $1 for each $1 the employee contributes on the first 3 percent of pay and then 50 cents per $1 saved on the next 2 percent of pay. A worker with a $50,000 salary would only need to save $1,500 to achieve the same $1,500 match using this formula. And if that worker saves $2,500 he would get the maximum possible match of $2,000.

About 8 percent of plans have a dollar cap, such as $2,000, after which the company stops matching. A few plans also have variable formulas based on factors such as age or job tenure.

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Non-matching contributions. Some companies make non-matching contributions to employee accounts, typically through profit-sharing or employee stock ownership plans. Employees don’t need to save to receive these contributions, but they are typically required to spend a certain number of months or even years with the same employer before earning them. Three quarters of companies vary the amount of non-matching contributions by age or job tenure. Only a quarter of employers provide all participants the same percentage of pay. The median non-matching contribution is 3.9 percent of pay and the top 9 percent of companies contribute 10 percent of pay or more.