your 401(k) #5: employer match

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  • Does your 401(k), 403(b), or 457 plan have a match?
  • How much is it? Is it a set dollar amount, or a certain percentage?
  • How much do you have to contribute to max it out? Are you contributing enough to get the full benefit?
  • When does the matched money vest? Is it all yours to keep immediately, or does it not become “yours” for a few years?
  • If you left your job tomorrow, could you take that money with you? Or would your company get to keep it?

If you know the answer to all of those questions above, bravo! You’re a unicorn as far as 401(k) participants go.

Don’t know the answer to those questions? Don’t even know what I’m talking about when I say "employer match”?

No. Worries. Read on.


Quick recap from last video: When you put money into your 401(k), 403(b), 457, or other retirement account, those funds are called contributions. You may also hear them called elective deferrals because you are choosing (electing) to set that part of your compensation aside for later (deferring it).

In some retirement plans, your employer will put extra money into your account on your behalf. Most often, this comes in the form of a match - some dollar amount that “matches” a portion of what you contribute. Because it’s meant to match your contributions, you have to put money into your account in order to get it.

The amount of the match, if any, varies, but there are three basic match structures:

  1. Set $ amount

    • This one’s pretty straightforward. Your company will match you dollar for dollar up to $X.

    • For example, your employer may match you 100% up to $3,000. That means that for every dollar you put in up to $3,000, they’ll put in a dollar to match. So if you put in $2,000, you’ll get $2,000 extra. If you put in $3,000, you’ll get $3,000. If you contribute the annual max set by the IRS, which is $18,000 this year, you’ll still only get $3,000 because that’s the max your employer will match.

  2. Full match up to a certain % of your income

    • This one depends entirely on how much money you make.

    • For example, your company may match you dollar for dollar up to 3% of your income. If you make $50,000 per year, 3% of that is $1,500. For every dollar you put in up to $1,500, your company will throw in an extra dollar.

  3. X% up to a certain % of your income 

    • This one also depends on how much money you make, but instead of matching you dollar for dollar, your company will only match a certain % of every dollar you put in.

    • For example, a common match of this sort is 50% up to 6%. That means your company will throw in an additional 50¢ for every dollar you contribute up to 6% of your income. If you make $50,000 per year, 6% of that is $3,000, and 50% of that is $1,500. So if you contribute $1,000, you’ll get $500 extra as a match. If you contribute $3,000, you’ll get $1,500. And if you contribute more than $3,000, you’ll still only get the max of $1,500.

     If you haven’t realized it yet, let me spell it out for you. No matter your plan’s structure, an employer match is: 

F-R-E-E  M-O-N-E-Y.

It’s the only true, guaranteed return on your money that you can count on. And quite frankly, you’d be a cotton headed ninny muggins to not take full advantage of it. (Elf, anyone?)

That’s why everyone (your parents, financial advisors, money experts, colleagues, ME) say to “max your match!” Doing just enough to max out your match may not be enough, though.

  • As we covered in the last video, experts say you should be contributing ~15% of your income every year.
  • If your employer matches you dollar for dollar up to 3% of your income, you’d have to contribute at least 3% of your income to max it out.
    • BUT your 3% and the 3% your employer throws in only add up to 6%, well below the 15% level.
    • In order to reach 15%, you’d have to contribute 12% of your income on your own.
  • If your match is 50% up to 6%, you’d have to contribute 6% of your income to get an additional 3%.
    • But 6% + 3% = 9%, still below the recommended level of 15%.

Make sure to ask what your plan’s match structure is, and what you need to do to get the full benefit!

And remember, experts recommend you contribute ~15% of your income every year, but it doesn't all have to go into your 401(k)/employer sponsored account. For various reasons, you may want to max out your match in a 401(k), then put the rest of your 15% in an IRA or other investment account. You'll learn why once we start talking about investment options and fees. Hang in there!  



But wait, there may be a catch! In some plans, your match money is yours to keep immediately. However, in more than half of today’s plans, your match money doesn’t become yours until it vests. Vesting means that ownership of those funds switches from the company’s hands to yours. There are two common vesting schedules:

  1. Cliff vesting
    • None of your match money becomes yours until you’ve worked at the company for X number of years (maybe 2 or 3).
    • Once you’ve been at the company that long, all of your match money becomes yours, including future match funds.
    • If you leave the company after that time period, you can take your matched contributions with you.
    • If you leave the company before you reach the cliff date, you forfeit your match money. The company gets to keep it.
    • The contributions you put in, however, are always yours to keep.
  2. Graduated vesting
    • A certain % of your match money vests (becomes yours) every year.
    • For example, your company may have a 5 year vesting schedule: 
      • Year 1, 20% vests
      • Year 2, 40% vested
      • Year 3, 60% vested
      • Year 4, 80% vested
      • Year 5, 100% vested
    • If you leave your company after 3 years, you get to take all of your contributions with you, but only 60% of what your company has matched.
    • If you stay for 5 years or more, it's all yours to keep.

Why do companies do this? To inspire loyalty. To incentivize you to stay with them for a long period of time.


"front loading"

One more thing to be aware of: front loading. And no, we’re not talking about washers.

“Front loading” is when you make large contributions to your account in the beginning of the year instead of spacing them out evenly. If you do this and reach the federal maximum of $18k before the end of the year, you may end up leaving money on the table. Here’s how:

  • Let’s say you’re making $90k per year, and you contribute 20% every month. Your match is a full 3%. In this case, you’d contribute a total of $18k for the year (20% x $90k), and you’d get $2,700 (3% of $90k) as a match.
  • However, if you decided to contribute 30% every month, you’d end up reaching the $18k limit in just 8 months. At that point, contributions would stop coming out of your paycheck since you would've already hit the federal maximum. If your employer matches you 3% per month, but stops once your contributions stop, you’d only end up getting $1,800 as a match. You’d be missing out on $900!

Some companies will “true-up”, or keep paying your match even after you’ve reached the federal limit, but not all. If you’re going to front load your contributions, make sure you’re not leaving any money on the table.


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