Many employers have reduced or eliminated matching in the past several years. If you’re fortunate enough to still have a match, you want to take full advantage of this potentially significant boost to your retirement plans. Every dollar your employer contributes toward your retirement is a dollar you don’t have to.
To make the most of employer matching, you need to answer two questions:
- What’s the formula?
- How does my employer handle “maxing out” — reaching the federal limits of $16,500 for 401(k) plans for those under 50, and $22,000 for those 50+ — before the end of the year?
The first part – understanding the formula — is usually the easy part. Once you know the formula, you need to contribute at least as much as they match if at all possible. A common formula is 100% up to 3% and then 50% on the next 2% — so you would need to contribute a minimum of 5% to get the full match. Other times, employers match up to 6%, 10% or more, so your contributions to make the most of the match are higher.
The next part – answering the max out question — can get more complex. Sometimes the most aggressive and well-intentioned savers actually hurt themselves by completing their full contribution before the end of the year. Companies have several choices in how they approach calculating your match, and it all really depends on your plan’s summary plan description. Here are some of the ways it’s handled:
- If you don’t make a contribution in a particular pay period, no match for that pay period. This way can result in forfeited matching contributions if you don’t spread your deferrals out over the whole year.
- The employer spreads your “earned” match out over the entire year regardless of how early in the year you max out your contributions. This way never results in forfeited matching.
- Employer stops matching when your contributions max out, but then “trues up” their match early the following year.
As you can see, front-loading your contributions doesn’t hurt you in the second and third scenarios, but can reduce your match significantly in the first scenario. To find out how your company handles it, read your plan description or make a call to your 401(k) provider or benefits departments. Then make sure you time your contributions to comply with your company’s practices on awarding the full match. It’s also a good idea to monitor your paycheck stubs and retirement plan account statements to ensure that matches are happening correctly.
With saving enough for retirement an increasingly big challenge, it’s important to take full advantage of every bit of help we can get.