Working with folks over the years, I am still surprised that a lot of qualified workplace plan elements still seem to be confusing, if not a mystery to many. This week, I am talking specifically about the match that usually accompanies 401(k) and other qualified workplace plans. I’ve found that most folks are a little unclear about what it is, how much it is, and how it works. This is not surprising since companies offering these plans have a lot of options when designing their plan.
Pop quiz, how much does your plan match? First, let’s define what exactly match is in relation to a qualified workplace plan. A match is the amount of free money your employer is willing to give you. Granted, there are usually some plan design strings to allow you to keep that money. For one, you generally have to be an active participant and contributing a percentage of your pay to receive a match from your employer. It is possible that an employer can make a contribution to your plan without you participating. But, that’s a topic for another day.
Don’t let free money slip through your hands!
Let’s look at a common 401(k) plan match for a participant. Let’s say you earn $100,000 per year. And, let’s say you decide to contribute 5% of your salary to your 401(k) plan. Your employer says they will match 100% up to 6% of your contributions. You are putting in $5,000 of your own money and your employer is matching that at $5,000 as well. Congrats! You’ve just saved $10,000 for the year. But wait… your employer is willing to match 100% up to 6% of your salary. That means you are missing out on a free $1,000 for the year! In this case, raise your personal contribution another 1% to get that free money. That’s what financial planners mean when we say contribute at least to your match level.
Companies may also use a tiered design for matching. For example, they may match 100% on the first 3% of contributions and then 50% on the next 2%. That 50% would mean 50 cents on the dollar. So, if you are contributing 5% of your $100,000 salary, you would receive $4,000 in free money under this design for a total annual savings of $9,000 (your $5,000 + the free $4,000).
To find how much your company is willing to match, you need your plan document. This could be the master document, or the summary plan document (SPD). The amount should be detailed in the employer contribution section.
All of this is great news if you work for a company that provides a match. Remember, employers are not required to offer any match, but most offer something. In addition to the match, employers are allowed to time when you have a right to that match money. This is where the term vesting (in relation to retirement plans) comes in to play. Vesting is when you have received an unconditional entitlement to that benefit (the match money). This vesting schedule can range from immediately at the most generous companies, to several years at other companies. For example, you may be at an employer that provides a generous match, but requires you to work a certain number of years to earn 100% of the match offered. If so, you may be on a vesting schedule that stipulates 20% per year vesting, for example.
Whether the match is a low percentage, or has a long vesting schedule, the match is a major perk with qualified retirement plans. It’s free money to help secure your future. Make sure if you are eligible, you are contributing at least to the match level of your plan.
As an independent CERTIFIED FINANCIAL PLANNER™, I can help you. Contact me and let’s get started on creating some peace of mind. #talktometuesday #documents #CFPPro #documentsyouneed #401k #match #vesting #vest #qualifiedplan #retirement