401k Match Pros and Cons: What You Need to Know | PD (2024)

FAQs

Is a 401k worth it with matching? ›

Q: Is a 401(k) worth it with matching? A: Every employee must decide if participating in a 401(k) plan is worthwhile given that person's unique financial situation. However, an employer match usually makes participating and contributing at least enough money to receive the full employer match more attractive.

The employer must make at least either: A matching contribution of 100 percent for salary deferrals up to 1 percent of compensation and a 50 percent match for all salary deferrals above 1 percent but no more than 6 percent of compensation; or. A nonelective contribution of 3 percent of compensation to all participants.

A study by Vanguard reported that the average employer match was 4.5% in 2020, with the median at 3% of salary. In 2023, if you're getting at least 4% to 6% in 401k employer matching, it's considered a “good” 401k match. Anything above 6% would be considered “great”.

If you elect to defer only the minimum amount to your retirement savings account, employer contributions may represent a significant amount of your balance. There are circumstances under which an employer has the right to take back some or all of its matching contributions to an employee's 401(k) plan.

For employers, a 401(k) employer match offers a strong tax benefit. Since 401(k) match dollars are seen as compensation, they will lower an employer's taxable income for the year, also reducing their tax liability.

Then, Contribute 10% to 15% of Your Pay

A common rule of thumb is to set aside at least 10% of your gross earnings as a start—after you've secured your company match, that is.

Match formulas vary, but a common setup is for employers to contribute $1 for every $1 an employee contributes up to 3% of their salary, then 50 cents on the dollar for the next 2% of an employee's salary. Ideally, workers should aim to save 15% of their pre-tax income each year, including any match.

A saver can contribute up to the annual salary deferral limit to their 401(k) each year, and an employer can match or contribute up to the combined IRS annual limit referred to above. The sum your employer matches does not count toward your annual salary deferral limit.

The amount of cash that's in the fund when you retire is what you will receive as a pension. Thus, there is no guarantee that you will receive anything from this defined contribution plan. The fund may lose all (or a substantial part) of its value in the markets just as you're ready to start taking distributions.

What are three disadvantages of 401k accounts? ›

401(k) Benefits. 401(k)s offer workers a lot of benefits, including tax breaks, employer matches, high contribution limits, contribution potential at an older age, and shelter from creditors.

If your employer doesn't offer any match, you may be wondering if you should still participate. The short answer, in most cases, is that it does still make sense to contribute to a 401(k) because it can offer significant tax advantages.

While you should aim high and ask for the best possible 401(k) match, you should also be prepared to compromise and accept a lower or alternative offer. You need to be flexible and realistic about what your employer can afford and offer, and what trade-offs you are willing to make.

We generally recommend contributing to a 401(k) even if your employer doesn't match, but you might want to pass over the 401(k) if: You can't afford to make any contributions to a retirement account (in which case you should take a hard look at your budget and start planning how you can start saving).

The value of 401(k) plans is based on the concept of dollar-cost averaging, but that's not always a reliable theory. Many 401(k) plans are expensive because of high administrative and record-keeping costs. Nonetheless, 401(k) plans are ultimately worth it for most people, depending on your retirement goals.

The most common partial match provided by employers is 50% of what you put in, up to 6% of your salary. In other words, your employer matches half of whatever you contribute … but no more than 3% of your salary total. To get the maximum amount of match, you have to put in 6% of your salary.

There are pros and cons to both plans, but pensions are generally considered better than 401(k)s because they guarantee an income for life. A 401(k) can be more aggressively managed by the individual, which could create more growth than is likely from a pension fund.