Key takeaways
A 401(k) match allows an employee to receive “free” money from their employer for contributing to their retirement plan.
The amount of the match can vary with the employer’s contribution being a full or partial match up to some percentage of the employee’s salary.
A 401(k) match is typically subject to vesting requirements, meaning this money does not become fully the employee’s until after some period of time.
A 401(k) match is when an employer contributes a certain amount to an employee’s retirement account based on how much the employee contributes. Matching contributions from employers are fairly common, and taking advantage of them is an important part of saving for retirement. Experts sometimes refer to employer matches in retirement plans as “free money” because your company is giving you extra money just for contributing to your own retirement account.
How 401(k) matching works
Many companies offer a 401(k) match as part of their retirement plan, but the exact terms of the match will depend on your employer’s unique offering. Here’s how the most common types of 401(k) matches work.
Partial matching
A partial 401(k) match is when an employer contributes a portion of whatever the employee contributes to their retirement plan. For example, the employer might agree to match 50 percent of the employee’s contribution up to the first 6 percent of the employee’s pay. This means that if you make $60,000 per year and contribute 6 percent of your pay to the 401(k) plan, or $3,600, your employer will also contribute $1,800 (half of your contribution) for a total contribution of $5,400.
You should make sure that you’re at least contributing enough money to your retirement plan to receive the full matching contribution from your employer. This is what experts are referring to when they talk about “free money.” It’s like earning a guaranteed 50 percent return on your contributions.
Dollar-for-dollar matching
In a dollar-for-dollar match, employers agree to contribute 100 percent of the employee’s contribution up to a certain percentage of the employee’s pay. In this scenario, if you earn $60,000 per year and contribute 3 percent of your pay to a 401(k) plan, your employer will match the contribution, allowing you to reach a total contribution of 6 percent of your pay. In this scenario, your contribution would be $1,800 and your employer’s match would make it a total contribution of $3,600.
It’s important to think about what the total contribution to the plan will be and whether that amount is enough to help you meet your retirement goals. In many cases, simply contributing what’s necessary to receive the full matching contribution from your employer likely won’t be enough to help you reach your long-term goals.
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