Defined contribution plans such as 401(k) and 403(b) are the most common retirement planning vehicles today. With these plans, responsibility for investment decisions, risks and performance lies squarely on the shoulders of the employee. More than ever before, employees need to be investments savvy.
One element of defined contribution plans that is fairly common is the employer match. In return for contributing to a company-sponsored retirement account, employers commit to make a matching contribution up to a certain percentage of the employee’s annual base compensation. The exact terms vary from employer to employer. Does your employer offer 401(k) matching? If yes, here are a few factors you need to be aware of
- Are there any eligibility requirements? For example, is there a minimum length of service before you qualify for the match?
- Is there a vesting period? Some employers require employees to remain in their service for a number of years before the match is fully vested.
- What is the contribution limit? Most employer matches range between 3 and 6% of annual base pay
- How much does the company match per dollar? Some companies offer a dollar for dollar match while others offer 50 cents on the dollar
Matching contributions are deposited into employees’ accounts at the employer’s discretion. My employer match for 2014 was deposited into my 401(k) account this month. It sure felt good to receive this boost to my retirement account. At the same time I couldn’t help but notice I had left some money on the table. You see, my employer offers a dollar for dollar match up to 6% of base pay. I only increased my contribution to 6% at the turn of the year so I didn’t take full advantage of the employer match.
Looking ahead, I fully intend to maximize the employer match every year. Now that I have hit the 6% 401(k) contribution mark, my next target is to keep raising my contribution until I reach the IRS limit (currently $18,000 per annum).
Do you have a 401(k) plan with an employer match? If yes, you will do well to understand the plan requirements and take full advantage of this avenue for growing your retirement nest egg.