Average 401(k) Match

Average 401(k) match guidelines are fairly inconsistently applied across employers. Any employee who has worked at more than one company can likely discuss the differences in 401(k) matching guidelines experienced at each of their employers. An employee can certainly use their knowledge of a traditional 401(k) match program to help them in their analysis of the employer’s total compensation offer. Generally, if an employer is known for offering an unfavorable 401(k) match that employer is likely to offer other unfavorable benefits as well. If an employee has an understanding of the typical range for 401(k) match offerings, the employee is in a better position to compare whether their prospective or current employer is offering a competitive 401(k) match. Lastly, employees should also consider the terms and length of a vesting schedule as it pertains to matching contributions.

The Bureau of Labor statistics indicate that the average employer 401(k) matching contribution is approximately 3.5 percent of the employee’s annual compensation; the median matching contribution is approximately 3 percent. A breakdown of the statistics is as follows:

  • 10 percent of employers provide a 401(k) matching contribution of greater or equal to 6 percent of annual compensation
  • 41 percent of employers provide a 401(k) matching contribution that falls in the range of 0 – 6 percent
  • 49 percent of employers do not provide employees with any 401(k) match

In terms of vesting schedules, employers also offer a variety of options for employees. The statistics reveal that less than 25 percent (22 percent) of employers offer 401(k) matching contributions that will vest immediately upon employer match. Roughly the same number of employers offer 401(k) matching contributions that follow “cliff” vesting timelines. These are defined as 401(k) matching contribution plans that impose time restrictions on employees based on a minimum length of tenure. If an employee does not meet this tenure threshold, the employee will not be eligible for any of the matching contributions. The remaining approximately 50 percent of employers offer “graded” vesting timelines, which allows employers to offer a vesting schedule that will vest a percentage of the matching contribution each years of employment until the employee reaches 100 percent vesting, which will typically occur after a specific period of time (generally 5 or so years). Lastly, approximately one-third of employers have 401(k) contribution guidelines that require employees to have been employed with the employer for one year before an employee can contribute their own earnings toward their retirement plans.

Eligibility

Generally, most employees (approximately 62 percent) are able to begin making contributions to their employer’s 401(k) retirement plans with earnings from their initial paycheck. However, only 46 percent of employers provide their employees with matching contributions immediately upon employment. While roughly one-third of employers will only begin matching contributions after an employee has been employed for one year.

Matching Amounts

Most employers will not provide employee with unlimited matching contributions. Employees who dream of contributing 75 percent of their annual compensation and getting a matching contribution from their employer are living in a dream world. To put this into context, the average employee will get slightly less than 3 percent of his/her employer in the form of a matching contribution, but there are many differing scenarios offered by employers. The most common matching contribution guideline is one in which an employer will offer to match each $1 of employee contributions, with an employer matching contribution of $.50 for each $1 contributed by employees. For those companies that contribute $.50 in matching contributions, the employer will usually only provide $.50 for each $1 an employee contributes to a maximum of 6 percent of the employee’s annual compensation. Other companies may offer employees a matching contribution of $1 for every $1 the employee contributes of their annual compensation. However, like all other matching contributions, the employers will usually have a maximum percentage amount of annual compensation for which they will match (generally only 3 percent).

Managing Your Plan

Generally, 401(k) retirement plans will provide an employee with approximately 20 mutual funds, usually a mix of actively managed funds (domestic and international) and passive index funds, from which to choose for their retirement plan contributions. When an employee has this many options available for investment, it is generally a bit easier to find a mutual fund that has performed well with low administrative fees.

About a one-third of employers will make professional investment advice available to their employees. However, less than one-fifth of employees who have the ability to consult with a professional actually do so. While most retirement plans are managed by professionals through mutual fund offerings, about one-third of employers will allow employees to take advantage of a self-directed option, which allows the employee to direct the investments in a manner consistent with a brokerage account relationship. The advantage of this type of option is that an employee can engage with a professional and also will have access to hundreds, if not thousands of stocks and bonds that are not part of the approximately 20 mutual funds usually available to employees.

Tips

If you are an employee who works for an employer offering a matching contribution plan, you would be best served to take advantage of the offering as a 401(k) match allows an employee to boost their 401(k) values much more quickly. If you happen to work for one of those employers, who offer an amazing matching contribution plan that is greater than or equal to 6 percent of your salary, your goal should be to contribute enough to secure the employer’s full match each calendar year.

For those employees on the other end of the spectrum that do not receive a matching contribution, your best option is to fund an IRA (Roth or Traditional) depending on your individual circumstances. For those employees who work for an employer who offers a 401(k) matching contribution, an employee is best served contributing to their 401(k) to the amount of the employer’s matching contribution maximum. Only then should the employee consider investing in an IRA. Maxing out an employee’s 401(k) contribution on an annual basis is a must do regardless of any employer matching contribution. Currently, the IRS allows for an employee to contribute up to $18,000 on annual basis.

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