What Is a Good 401(k) Match?

If you work for a company that has a 401(k) plan, congratulations. Retirement plans certainly aren’t getting better with each passing year. You’ve probably wondered how your 401(k) compares with other company plans. Are you missing out on free retirement money because you’re not working for the company down the road? To help us find the answer, we looked at the most recent 401(k) benchmarking data, published in 2014.

Eligibility

First, who’s eligible? According to data, 62% of employees can contribute to their company’s 401(k) plan with their first paycheck. It’s fewer for companies that provide matching contributions. About 46% of companies that offer the match give it to employees when they start; another 29% require that they have one year of service before it begins.

Match Amounts

Companies don’t match an unlimited amount. In other words, you can’t contribute half of your salary and watch your company match all of those funds.

The majority of companies offer some sort of matching contribution for an average of 2.7% of a person’s pay, but there are many formulas out there. The most common match was 50 cents on the dollar. For every $1 you contribute to your company 401(k), your company will contribute 50 cents. About 40% of companies contribute 50 cents for every dollar employees contribute up to 6% of their pay. Another 38% match employee contributions dollar for dollar, but the maximum is normally lower – commonly 3%. 

Although the maximum amount the company could pay the employee is the same with each of those plans, under the most common option the employee has to contribute more to get the maximum company match. Depending on the quality of the 401(k) plan, that could work to the disadvantage of the employee, because he or she could be forced into less-than-stellar investment vehicles with high management fees. (For more, see The Best ETFs for Your 401(k).)

Managing Your Plan

In fact, most plans now offer an average of 19 funds, most of which are actively managed domestic and international stock funds. The next most common are domestic index funds. The more options available to you, the better your chances of finding a well-performing option with low fees. You should never turn down free money as long as most of it is remaining in your account.

What good is a match if you don’t have the knowledge and experience to invest the money into the best funds in your plans? About 35% of plans had somebody who would offer investment advice to their participants, but only about 18% of the employees put the advice they received into action. 

An increasing amount of plans are offering a self-directed option, although it’s still only 28%. A self-directed plan allows you to manage your account on your own, similar to a more traditional brokerage account. You could get the help of an independent advisor, or, if you have a larger than average amount of investing knowledge, you could do it yourself. The advantage is that instead of having 19 investing options you have thousands, including individual stocks and bonds that don’t come with all the management fees of mutual funds. (For more, see How to Maximize Returns by Choosing the Self-Directed Option.)

The Bottom Line

The most common employer match is 50 cents on the dollar of up to 6% of your salary. Most advisors recommend contributing enough to get the maximum match. Turning down free money doesn’t make sense unless the fund is so bad that you’re losing most of it to fees and substandard returns. As with any choices related to your retirement, talk to a financial advis0r who won’t make money depending on the fund for which you sign up. Look for a fee-only advisor. For more, see 7 Steps to Evaluate a Financial Advisor.