The Most Overlooked Investment Opportunity: The Employer Match

How Employer Matches Work and How to Maximize Them

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An employer match is a contribution made by your company to your workplace retirement plan such as your 401(k) plan or 403(b) plan. While there is a great range in the level of employer match that is offered (if any at all), any matching program is a great matching program. Taking advantage should immediately become your most important financial move as nowhere else can you receive a guaranteed rate of return on your money.

How Employer Matches Work

When your employer offers some form of employer match on contributions made to their retirement plan, they are essentially saying that they will match, up to some limit, the amount your contribute. So if you decide not to participate in your employer's retirement plan, your employer is off the hook and won't make any contributions on your behalf. If you do set up payroll deductions to fund the plan, your employer will contribute to your account as well - it's essentially free money as long as you continue to contribute and have fully vested.

How Employer Match Vesting Schedules Works

What does vesting mean? More employer match plans come with a vesting schedule as an incentive for staying employed with the company. While your employer will begin to match your contributions (according to their plan) the moment you make your first contribution, you likely do not have immediate rights to that matched money.

Your company's vesting schedule will determine when your fully vest, or can claim full ownership of those matches and their earnings. Most vesting schedules have a duration of several years before you are full, or 100% vested, and many provide for partial vesting that increases as the years pass. For instance, your company may have a 5-year vesting schedule in which after your first year of employment you are not vested (0%), but after year two you are 25% vested, and after year three you are 50% vested, and so on until you reach 100%.

Common Employer Match Schedules

While an employer can determine the limits on their employer match program, the most common employer match is a 50% match up to 6% of your salary, meaning for every dollar the employee contributes, the employer will contribute 50 cents, but only up to the limit of 6% of that employee's salary. This effectively means that if any employee maximizes their employer's contributions, their employer's contributions will equal 3% of the employee's salary. That's like getting a 3% raise and immediately saving the extra money from each paycheck in a tax-advantaged account!

But some employers offer other match schedules, like on that is known as the Safe Harbor match, after the provisions of a Safe Harbor 401(k) Plan. This match is typically a 100% match up to 3% and then a 50% match from 3% to 5%. With this match, an employer would match dollar-for-dollar up to 3% of the employee's salary the 50 cents on the dollar for anything above 3% and below 5% of their total salary.

How to Calculate an Employer Match

Say your employer offer the most common match and matches 50% of the first 6% of your total salary you contribute. Let's further say your gross income for a pay period is $3,000.

If you contribute 6% of your gross pay, your 401(k) contribution would be $180 per paycheck (calculated as 6% multiplied by $3,000). Since your employer matches half (50%) of your $180 contribution, they will add another $90 to your 401(k) plan. Between the two contributions, yours and your employers, you effectively just contributed $270 by only really saving $180 ($180 + $90). To add to that, if your deductions are before-tax (not Roth 401(k) contributions) you also saved on the taxes you would have paid on that $180. No other investment opportunity exists with such an instantaneous and guaranteed rate of return as that 401(k) employer match.

How to Maximize Your Employer Match

If your employer offers a 401(k) matching program, one of your first financial goals should be to maximize that match to save - and make - as much money as you can for retirement.

To maximize your employer match, which is to say to get as much as you can, you should begin contributing at least to the limit. If you employer offers the Safe Harbor match, for instance, then you should contribute at least 5% of every paycheck to your 401(k) to ensure that you get as much in free employer match money as you are eligible. 

In the end, a vested match is like winning at a casino every time you play. Why do anything else with your money? Take the free money only a 401(k) match provides.