Many workers who stash money in a 401(k) retirement plan get
some sort of matching contribution from their employer — it just may be a while
before that money is entirely theirs.
While the majority (82%) of employers that offer traditional
401(k) plans say they match a portion of their workers’ account contributions,
just 28% allow employees to immediately take full ownership of that extra
amount, according to a report from human resources firm XpertHR. Vesting times
— how long you must work at the company for its matching contributions to be
100% yours — range from up to one year (13%) to six years (10%).
“Employers who do not [immediately] 100% vest the match do
so because they want to reward longer-service employees,” said Robyn Credico,
managing director of retirement at Willis Towers Watson, a business advisory
firm.
The most common length of time that workers wait to be 100% vested
in company matches is three years, Credico said.
The vesting either happens gradually — i.e., 20% of the match is vested after one
year, 40% after two years, and so on — or occurs all at once after the vesting
period. (And, of course, any contributions you make to your account are always
100% yours.)
“The additional money saved by not vesting short-term
employees can be used to provide a large match to longer-service employees,”
Credico said.
The median number of years that workers stay with an
employer is 4.1 years, according to the Bureau of Labor Statistics. The XpertHR
report showed that 28% of employers require a vesting period of more than four
years.
Despite the potential for facing a years-long vesting
schedule, it’s still worth contributing at least enough to get your company
match if you can afford to, experts say.
“Even if you don’t think you’re going to stay at a
particular company long enough to get the match, it’s still worth contributing
at least enough to earn it,” said Kathryn Hauer, a certified financial planner
with Wilson David Investment Advisors in Aiken, South Carolina.
“Financial planners continually beat the
‘save-for-retirement’ drum, and the amount you need to put in a 401(k) to get
the match is well below the amount you should save each year,” Hauer said.
Additionally, you never know what the future may hold
career-wise, she said. In other words, you may end up staying at a company
longer than you originally anticipated.
If you are able to contribute more than just enough to get
the match, financial advisors generally recommend that you do. The contribution
limit for 2021 is $19,500, with workers age 50 and older allowed an extra
$6,500 as a “catch-up” contribution for a total of $26,000.
The most common matching formula, according to Fidelity
Investments, is a 100% match for the first 3% of your salary that you
contribute, with a 50% match for the next 2%.
By way of example: Say your annual salary is $50,000. If you
were just to contribute enough to get the employer match, the most common
matching formula would mean you contribute 5%, or $2,500, in a year, and your
company would put in another $2,000 — totaling $4,500 a year. If you did that
for only one year, the money would be worth about $26,200 in 30 years, based on
a 6% annual return, according to data provided by Fidelity Investments.
If you were to do that five years in a row, with your salary
increasing 2% yearly, your account would be worth roughly $69,000 in 30 years.
Ten years in a row? The account would hit $202,300 in three decades. And the
amount that came from the employer match would be $89,900 — 44% — of it.
Remember, too, that if you have a traditional 401(k) plan,
your contributions are made pretax, which reduces your taxable income (and, in
turn, how much you pay in taxes), although your withdrawals in retirement will
be taxed. If it’s a Roth, your contributions are made after-tax, but
distributions later in life are generally tax-free.
And, whether you contribute to a traditional or Roth 401(k),
the company’s match always goes into the former and is not taxable
compensation. Also, employer contributions do not count toward the contribution
maximums.
The survey used for the XpertHR report was conducted from
March 30 to April 23 and includes responses from 452 U.S. employers of varying
sizes and industries.
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