If I walked up to you and said I would match dollar for dollar, all the money you save in your bank account, you’d jump at the chance wouldn’t you? Maybe…after you verified that I had not just escaped from a mental institution.
That’s exactly what many of you get with your employer’s match in your 401(k) plan, a dollar for dollar match. It’s basically FREE MONEY! However, many employees do not take advantage of the 401(k) match benefit.
Now who’s crazy?
How the Employer Match Works
Some employers offer 401(k) plans with a match. Other employers have different types of plans that offer no match or even don’t offer a 401(k). The SIMPLE plan, another retirement plan, does offer a matching contribution benefit as well. The example that I am using is with a 401(k).
A very common match is a 50% match on the first 6% deferred by the employee. So for every dollar you put in, up to 6% of your salary, they employer will match that dollar with 50 cents. If your salary is $50,000 and you defer the entire 6%, or $3,000, your match will be $1,500! So your employer is SHOWING YOU THE MONEY!
One of the best match scenarios I’ve seen is with the University of Kentucky’s retirement plan. They match a whopping 2 for 1! Yep, that’s right, $2 for every $1 you put in. This is rare and most employers don’t match quite this generously.
Dumb Reasons People Pass on the Match
Believe it or not many people do pass on the employer’s match in their 401(k) plan. There are probably two main reasons. So here they are.
Dumb Reason #1
First, they do not understand how a 401(k) plan works, or just don’t understand investing. Investing in your 401(k) doesn’t have to be confusing. If you are just completely clueless, you could pick a target date fund or an asset allocation fund. Both funds do all the investment selection for you and rebalance periodically. Try to pick a target date fund that matches your retirement date. If your plan offers an asset allocation or lifecycle portfolio, select a fund that matches your risk tolerance.
Dumb Reason #2
Second, some people think they cannot afford to invest. I’ll address this by simply saying that’s just nonsense. Look at your budget and reduce eating out once in a while, or some other expenditure that you really need to cut back on. You can find the money. In addition, when you invest money in a 401(k), none of those funds are taxed when they are deducted from your paycheck. Therefore, part of that contribution was going to Uncle Sam in taxes. So I just found you some money to contribute!
This is one of the best benefits you can get from your employer. Don’t pass on the matching contribution in your 401(k). Contribute up to the match, if that is all you can afford. Remember, save your money and one day it will return the favor. If you need assistance or have a question about employer matching or retirement planning, write me at firstname.lastname@example.org or call me at (859) 225-2596.