Quick thoughts on employer match

I have some quick thoughts on employer match in your 401(k). Let me start by saying I completely understand that you may not be able to contribute a huge amount to your 401(k). I advocate many times on social media to contribute as much as you can, even if it is only $10.00 per month. The concept of compounding interest can turn even small amounts into nest eggs over time, but an in-depth article on that concept will be coming soon.

But today I wanted to talk about free money. Employer match means that for every dollar you contribute to your 401(k) via payroll deduction (i.e., 3% of each paycheck), your employer will match up to, or in some cases, all of, that money. Note when I say “match” I mean they will contribute it to the Plan as well into your account. They are not going to send you a check. They are giving you FREE money, for doing nothing other than investing in yourself via your 401(k) portfolio. Typical examples are 50% of the first 6% of compensation deferred, but in case this is a new concept for you, let’s start with a basic example. Let’s say my employer will match “100% of the first 3% of compensation deferred” into my retirement Plan. That means that if I elect to defer 1% of my paycheck into my employer’s 401(k) Plan, my employer will match that, dollar for dollar, on my behalf. If I defer 2%, they will again match it dollar for dollar, same with 3%. However, if I elect to defer 10% of my paycheck into my Plan, only the first 3% will be matched.

As you can see, in order to maximize the amount of free money that I receive (free money being the employer’s contribution on my behalf), I need to elect to contribute AT LEAST 3% of my pay in order to take full advantage of that benefit. Let’s say I only contribute 2% to the Plan. My employer would have given me that extra percent of pay, if I was able to contribute it myself as well.

That’s why I definitely advocate for those who have either just joined a retirement Plan or have not paid much attention in the past contact their Plan Administrator (typically start with your HR department), and inquire what the match rate is, as you may be missing out on some free money.