Skipping Your Employer 401(K) Match? The Average Worker Loses $1,800 Annually
An employer 401(k) match contribution is part of many employment packages. For every dollar a worker contributes into their 401(k), the employer will match it up to a certain percentage of their wage.
“The issue is that most employees do not claim this offer, and for many that is because they don't understand that their employer is giving them free money,” said financial analyst Brennan Kolar, founder of Atlas CPA Index. “It is a part of your compensation package when you sign an employment agreement, and to claim it you just need to contribute up to the percentage your employer matches each year.”
Learn How: Suze Orman Warns This Common 401(k) Mistake Could Cost You Thousands
Get Money: Start Growing Your Net Worth With Smarter Tracking
Read on to see how much money you may be missing out on if you don’t take full advantage of your employer match options and discover one of the biggest mistakes you’ll want to avoid.
How the Money Adds Up
Here’s an example of how this may play out for an average worker in the United States.
Example worker
Salary: $72,000
Employer match: dollar-for-dollar on the first 5% of pay, a common formula
Full match available: 5% of $72,000 = $3,600 per year
Employee actually contributes: 2.5% or $1,800 per year
Breakdown
Required contribution to earn the full match: $3,600
Actual employee contribution: $1,800
Employee contribution shortfall: $1,800
Employer match earned: $1,800
Employer match forfeited: $1,800
Total free money lost in one year is $1,800. The total that failed to reach the account, counting the worker's own missing half, is $3,600.
Additionally, pre-tax contributions reduce taxable income, so that $1,800 that was not contributed became a paycheck the employee kept at the cost of a few hundred dollars in tax.
Missing Automatic Enrollment
One of the biggest mistakes many workers make when it comes to employer 401(k) matches is that they miss autoenrollment.
“People shouldn't think of it as a perk, but instead, as part of their base compensation,” said Chad Cummings, an attorney and certified public accountant (CPA) at Cummings & Cummings Law. “Employees will waste time negotiating over a $1,000 salary difference while ignoring the 401(k) match altogether.”
Keep in mind that autoenrollment terms vary by employer. Autoenrollment at 3% can make employees believe they have addressed retirement, even when their employer requires 6% to earn the full match. Always read the fine print.
Some employers calculate matches paycheck by paycheck without year-end true-ups. Maxing out contributions by June can mean forfeiting six months of matching opportunities, according to Cummings. A three-year cliff-vesting provision can also erase the entire employer-funded balance when someone leaves after two years.
“I recommend checking both provisions before changing contributions or employers,” Cummings added. “No two 401(k) are alike and matching provisions vary dramatically. Don't make any assumptions here.”
The Bottom Line
It can be easy to leave money on the table when it comes to your 401(k) and not taking advantage of employer matching options. One way to start is to read through information provided by your employer and revisit your options every six months or once a year.
“Some people may think they need to wait until they have more money to invest so they can build wealth,” said Marguerita Cheng, certified financial planner (CFP), CEO of Blue Ocean Global Wealth. “It’s important to have a financial plan to help you identify, clarify and quantify your financial goals so you can pay down debt, build cash and reserves and save for your retirement.”
This article was provided by MoneyLion.com for informational purposes only and should not be construed as financial, legal or tax advice.
More From MoneyLion:
