In an effort to recruit employees
in competitive fields and help motivate older workers to leave the workplace
when they hit retirement age, companies are becoming more generous with their
retirement savings plans.
After pulling back on the extras
during the recession, companies are devoting more to 401(k) matches, the free
money they give employees who participate in company retirement savings plans.
Including the money they put
toward 401(k) matches and benefits such as profit sharing, the average company
contributed 4.7 percent of each employee's salary toward retirement savings in
2016, according to a study by the Vanguard Group, a mutual fund company. That
was a notable increase over 2015, when companies contributed only 3.9 percent
of each employee's salary.
Despite the extra help, Americans
in general are still far behind in saving what they need for retirement. About
half don't have 401(k) plans, and even those who do often don't stash away enough.
The Boston College Center for Retirement Research
has estimated that almost half of Americans are not going to have enough
savings in retirement to cover their needs.
To best position themselves for
retirement, employees should save about 10 percent of their salary a year
starting with their first job. If they wait until their 30s to start saving,
putting away 12 to 15 percent a year is considered advisable.
It doesn't all have to come out
of pocket, however, and that's where matching money from employers helps. For
example, a person getting a 3 percent match could put away only 7 percent of
his or her salary and still fulfill the 10 percent savings goal.
According to the Vanguard study,
about 97 percent of 401(k) participants get some matching money on the job.
Over a lifetime of work, that can add hundreds of thousands of dollars to a
The most common match, according
to Vanguard, is 3 percent of an employee's salary. To qualify for it, most
employees would have to contribute 6 percent of pay to the workplace retirement
plan. The employer would then match 50 cents of every dollar the employee
stuffed into the 401(k).
Consider the impact: A
25-year-old earning $40,000 a year, who never gets a raise but does get a 3
percent match from an employer each year for 40 years, would end up with about
$256,300 from the matching money alone. That assumes the money would be
invested in a stock and bond mutual fund in the 401(k), earning an average of 7
percent a year.
Of course, the amount is likely
to be more since people do tend to get raises. But assuming that same $40,000
in pay each year, a person saving a total of 10 percent a year — combining
their the worker's own contribution and free money from the employer — could
have about $854,400 for retirement.
According to the Vanguard study,
half of people are saving about 10 percent or more with their employer's help
now. The average amount individuals contribute themselves is 6.2 percent.
The 3 percent company match is
the most common approach. The next most common approach is for employers to
match every dollar an employee contributes up to 3 percent of a person's
salary, and then do 50 cents on the dollar for the next 2 percent of pay,
"These are the good
guys," said Vanguard Center For Investor Research analyst Jean Young,
referring to companies that offer 401(k)s and matching money.
Some may be trying to compete for
employees. Others may be trying to motivate saving early enough in a person's
work life so that people retire when they hit retirement age. Many, said Young,
"want to set their employees on the right path."
Those offering the best matches
tend to be large established companies that can devote the resources and those
that have to compete to get top employees. Research by Aon Hewitt, a
Chicago-based human resources consulting firm, shows that 53 percent of companies
with between 1,000 and 4,999 employees are matching each dollar an employee
puts into a 401(k), up to 6 percent of their salary.
Under that circumstance, the
25-year-old with the $40,000 salary would put away 6 percent; the employer
would put away 6 percent, and by retirement the individual would have about $1
While matches are improving,
Young noted that's not the only reason companies seem more generous.
In the past many employees often
failed to sign up for 401(k) plans, or they contributed so little that they
didn't get all the free matching money to which they were entitled.
Consequently, during the last few
years, it's become common for companies to simply enroll their employees in
401(k) plans rather than waiting for people to take action. In addition,
companies have been nudging employees to save more by automatically deducting a
little more of their pay for the 401(k) each year. As a result, employees are
saving more without paying attention, and they are reaching the level of saving
where they qualify for every penny of free money that their employers will
give, Young said.
Often, the employer will start an
employee off saving 3 percent of the worker's salary in the company 401(k).
Then, each year, the employer will automatically raise the saving percentage a
little, with the highest point sometimes 6 percent of pay and sometimes 10
A decade ago, companies were
afraid to do this. They feared employees would balk, but that hasn't happened,
Young said. In companies that are doing automatic enrollment, 90 percent of
employees are participating in the 401(k) even though they have the option of
leaving the program. Companies that aren't automatically putting employees into
401(k) plans have only a 63 percent participation rate.
here for the original article from the Chicago