According to Data provided by CNN Money, up to 20% of eligible employees do not take full advantage of an employer contribution program.
401k plans with medium and larger employers are often eligible for employer contributions. Employees that raise their contributions can maximize the employer contribution and build a retirement fund, faster.
How Many Companies Offer a Contribution Matching Program?
One out of every four companies offers some kind of contribution matching. In the most generous plans, the employer contributions can be as high as 50% of the employee contribution. For somebody who is contribution $4000 to their retirement fund every year, this could mean an employer matched contribution of up to $2000.
In most cases, employees aren’t getting the full company contribution because they are only diverting the minimum amount of income to their 401k. By increasing their own contribution, they could then become eligible to receive the employer portion. Although this might seem unaffordable to many employees, the fact is that long term gains will be much more valuable than any sacrifices that need to be made now.
What’s the Recommendation for Employees?
The recommendation is quite simple. It’s always a better idea to pay more than the minimum contribution when there is an employer contribution available.
Paying the minimum (usually 3%) means it will take longer to build up a reasonable retirement fund. Even worse, it means missing out on free contributions that would be made by an employer. Most financial advisors would say that the minimum contribution should match the employer’s maximum…
Example: If the employer is willing to match 50% of employee contributions up to 6% of their salary, then the employee should contribute a minimum of 6% to their 401k.
This means taking full advantage of the employer contribution, without leaving any potential growth on the table. Making the jump to a 6% contribution might mean making lifestyle and spending changes, but the extra retirement security is more than worth the downsides.
It Simply Makes Sense to Maximize the Employer Contribution
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