The 401(k) Match’s Big Role in Retirement Security

Employees are more likely to save for retirement when offered a 401(k) match.

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A generous company 401(k) contribution can help propel you to a secure retirement. Employees without a 401(k) match will need to do even more saving on their own to produce an adequate retirement income.

“You probably need to save 11 to 15 percent of your income over your working life to adequately replace your income in retirement,” says Luke Vandermillen, vice president of retirement and investor services at Principal Financial Group. “You need to accumulate enough money to provide about 85 percent of your salary when you retire.”

[See How to Tell if You Have a Good 401(k) Plan.]

Simply saving enough in a retirement account to get the 401(k) match isn’t likely to reach that threshold unless your employer provides an unusually generous match. The most common employer 401(k) contribution is 50 cents for each dollar a worker saves up to 6 percent of pay. The maximum possible match using this formula is 3 percent of pay. An employee who contributes just enough to get the match will be saving 9 percent of pay each year, which is still short of Vandermillen’s recommended annual savings percentage. “Unless you are doing something above and beyond that you probably won’t adequately replace your income,” says Vandermillen. “You will probably need to save more.”

Of course, if your company has a more generous 401(k) match you may be able to get away with saving less on your own. IBM's retirement plan, for example, matches employee contributions dollar for dollar up to 6 percent of pay. An employee who contributes 6 percent of pay to the plan annually will end up saving 12 percent of pay each year. “IBM moved in 2008 from a defined benefit pension plan to the 401(k) Plus plan,” says Monica DelBello, director of compensation and benefits at IBM. “This was part of the company's strategy to encourage employees to have shared responsibility in saving for their future while better controlling IBM's retirement plan expenses.” Some 92 percent of IBM employees participate in the 401(k) plan.

[Bookmark the U.S. News Retirement site for more planning ideas and advice.]

Company 401(k) contributions can motivate people to save money for the future. “We definitely see higher participation rates in plans when they offer a matching contribution,” says Vandermillen. A 401(k) match that requires workers to save 6 percent or more of pay to get the full match may result in people saving more than they otherwise would. “When plans stretch that matching contribution out it gives an incentive for people to contribute more in terms of their own dollars,” says Vandermillen.

The exact matching formula also comes into play for employees unable to save enough to get the full match. A frontloaded 401(k) match is especially beneficial to workers who can only afford to save a small percentage of pay. Home Depot, for example, matches $1.50 for every dollar contributed to the 401(k) plan up to 1 percent of pay and then 50 cents per dollar contributed on the next 2 to 5 percent of pay once employees have been with the company a year. Approximately 70 percent of eligible Home Depot employees take advantage of the match.

[See 5 Ways to Size Up Your 401(k) Match.]

401(k) matches vary considerably from company to company and can be increased, reduced, or eliminated at any time. Waiting periods before you can join the plan, vesting schedules that may prohibit you from keeping the match if you don’t stay with the company for several years, and, of course, investment options and performance all play a role in how prepared you will be for retirement.