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How does a 401(k) match work?

Key takeaways

  • A 401(k) match is when an employer puts money in an employee's retirement account based on what the employee contributes.
  • Match formulas vary, but a common setup is for employers to contribute $1 for every $1 an employee contributes up to 3% of their salary, then 50 cents on the dollar for the next 2% of an employee's salary.
  • Ideally, workers should aim to save 15% of their pre-tax income each year, including any match.

An employer-sponsored retirement plan, such as a 401(k), can help build your retirement savings in 2 ways: Not only can you put money aside from your own paycheck, but you could also get extra money from your employer through a match. Here's how a 401(k) match works along with the average 401(k) match, according to Fidelity data.1

What is a 401(k) match?

A 401(k) match is when your employer contributes money in your 401(k) account to reflect the contributions you've made out of your compensation, like salary and bonuses. Other employer retirement plans, like a 403(b), work the same way.

Employers offer 401(k) matches as an extra form of compensation to attract and retain employees and to encourage saving for retirement. In addition to (or in place of) 401(k) matches, employers may also choose to make nonmatching, or profit-sharing, contributions to your 401(k), even if you don't contribute yourself.

More than 85% of 401(k) plans for which Fidelity is the service provider offer some type of employer contribution, according to Mike Shamrell, vice president of Thought Leadership at Fidelity. "As the largest service provider in the country with 24,800 plans as of March 2023, our numbers are viewed as a good indicator of what's going on across the retirement landscape," he says.

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How does a 401(k) match work?

Your employer determines how your 401(k) match will work, but they usually follow a formula of putting in a dollar or a portion of one for each dollar you contribute. If you have a full match, that means 100% of your contributions will be matched dollar-for-dollar. If you have a partial match, such as 50%, your employer will put in 50 cents for every dollar you contribute. Some employers use a combination of both the full and partial match. Your employer also chooses how much of your contributions they will match based on a percentage of your salary.

For example, a 401(k) plan might use the following setup: Your employer matches dollar-for-dollar until you've contributed 3% of your salary. Then they match 50 cents of every dollar up to another 2% of your salary. Any contributions you make above 5% of your salary will not be matched.

Note that any employer match doesn't count toward an individual's 401(k) annual contribution limit ($22,500 in 2023 or $30,000 for those 50 and up in 2023). However, the combined employer match and employee contribution in 2023 cannot exceed $66,000 or $73,500 for those 50 and up.

What is the average 401(k) match?

The most common 401(k) match formula on plans at Fidelity is a dollar-for-dollar match on the first 3% and then 50 cents on the dollar on the next 2%, according to Shamrell. So if an employee contributes 5% of their salary, they effectively get another 4% from their employer (3% + 1%, or half of 2% = 4%).

It's important to note that not all workers contribute enough to get the entire match. According to Fidelity data,2 here's how much employers end up putting in per employee on average, including nonmatching contributions, broken down by age:

20–29: 4.0%

30–39: 4.6%

40–49: 5.0%

50–59: 5.2%

60–69: 5.2%

70+: 4.7%

Overall average: 4.8%

The actual overall average employer contribution is 4.8%, higher than the 4% offered by the typical plan. This is because some companies offer much more generous plans, which pushes up the average employer 401(k) match.

Keep in mind that across all ages, the average amount an employer contributes as a match can be skewed by employees who save a lot for retirement in their workplace plans. In other words, a handful of employees contributing a high percentage to their 401(k)s could make it look like more people reached a match percentage than in fact did. This is especially true, Shamrell notes, when considering data that includes young employees, who tend to contribute less overall to their 401(k)s and are potentially missing out on more possible matching dollars than older employees.

"The good news is that as of Q1 2023, 78% of employees in plans for which Fidelity is the service provider are contributing at a rate to get their full company match,"3 he says.

How to make the most of your 401(k) match

If your employer offers a 401(k) match, it's a good idea to try to make the most of this free money. Consider these tips:

Try to get the full match. Ideally, you'd save enough for retirement to get the full 401(k) match, but Shamrell realizes this isn't always possible. "While we encourage you not to leave money on the table, we understand everyone has their own personal situation," he says. Do your best to budget and get as much of the match as possible, given your other financial needs.

Watch out for vesting schedules. Employers offer 401(k) matches to hang onto employees because of a process called "vesting," which requires you to stay at your job for a certain amount of time in order to keep the full match. For example, you might be entitled to 100% of an employer match if you've stayed 3 years, but none if you leave before then. Another variation of a vesting schedule is earning 20% of an employer match for every year you stay, so you receive 100% of the match once you've stayed for 5 years. Check your plan's rules if you're thinking of changing jobs. Note that any contributions you make are 100% yours.

Understand your company matching schedule. Shamrell suggests checking when your employer makes matching contributions. It can have a bigger impact than you might think. "Some will do it twice a year," he explains. "Others, every 2 weeks for every paycheck." If you don't make a 401(k) contribution according to the schedule, you could lose out on matching funds. For example, let's say you max out contributions early in the year. If your employer matches per pay period, you may miss out on the match for the rest of the year because you're no longer making contributions. Because of this, some companies offer what's called a true-up, which is when they make up the difference if you didn't get the full annual match because you maxed out your 401(k) too early.

Don't worry if you go Roth. Prior to SECURE Act 2.0, employer matches had to be pre-tax even if you were contributing to a Roth 401(k). The new legislation allows for post-tax employer match contributions, but it's up to the employer whether to offer them under the plan.

Be aware of HCE. In some cases, you may not be eligible for a full employer match if you're a highly compensated employee (HCE), which the IRS defines as someone who owns more than 5% of a company or makes a certain amount in compensation and was in the top 20% of earners at their employer. This is a lookback provision, meaning eligibility is based on the previous year's compensation. In 2022, the HCE threshold was $135,000 in compensation; in 2023, you are considered an HCE if you make at least $150,000. The maximum income an employer can match is $330,000 in 2023, per the IRS, so if you make more than that, you may not get the entire employer match.

Consider saving beyond the match. Once you're contributing enough to get your employer match, consider saving even more. Fidelity suggests saving 15% of your pre-tax income for retirement, which includes the match. If your employer gives you 6%, ideally you would put aside 9% of your salary to hit the target (6% from your employer + your 9% = 15%).

What to do if you don't have access to a 401(k) match

If you don't have access to a 401(k) match, Shamrell says to still try saving 15% of your pre-tax income. Because you're reaching for the target without the extra cash infusion from your employer, "you're going to need to save a bit more aggressively if you can," he says. These tips might help you find ways to hit the 15% number yourself.

What to do if you don't have access to a 401(k) at all

If you don't have access to an employer 401(k) plan, one option is to consider an individual retirement account (IRA), which could offer more and/or different investment options than an employer plan.

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1. Fidelity Investments Q1 2023 401(k) data based on 24,800 corporate defined contribution plans and 22.7 million participants as of March 31, 2023. These figures include the advisor-sold market but exclude the tax-exempt market. Excluded from the behavioral statistics are non-qualified defined contribution plans and plans for Fidelity's own employees. 2., 3. Building Financial Futures, Fidelity, Q1 2023.

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