What Is a Good 401(k) Match? How It Works and What's Average

If you work for a company that has a 401(k) plan, congratulations. As of 2020, nearly 60 million Americans took part in roughly 600,000 company retirement plans. According to Investment Company Institute, there were about $7.3 trillion in assets invested in 401(k) plans as of the end of June 2021.

Retirement plans managed to stay the course despite the effects of the economic crisis and the Great Recession, not to mention the fallout from the COVID-19 pandemic—especially 401(k)s. But things certainly aren’t getting better with each passing year, which means you’ve probably been wondering how your plan compares with other company plans.

There may be certain questions you have, though, when it comes to your retirement plan. Are you missing out on free retirement money because you’re not working for the company down the road? Keep reading to learn more about how 401(k)s work, company matches, and how to manage your plan.

Key Takeaways

  • The 401(k) plan is an employer-sponsored plan that allows working individuals to set aside a percentage of their paychecks to a retirement savings account.
  • These plans can come in two different forms: the traditional 401(k) and the less common Roth 401(k).
  • Many employers match employee contributions.
  • Plans allow investors to put their money into different investment vehicles with the most common being mutual funds.
  • Although employer contributions don't count toward your annual contribution limits, they are combined employee-employer contributions are capped each year.

How a 401(k) Works

The 401(k) is a special investment account designed to help working individuals save for retirement. The plan dates back to 1978 when Congress passed the Revenue Act. Working individuals were given an opportunity to avoid paying taxes on deferred compensation, such as bonuses or stock options.

The plan didn't gain traction until 1981. That's when the Internal Revenue Service (IRS) came up with rules to allow taxpayers to set aside payroll deductions to their 401(k) plans. Approximately 4.8 million people had access to a 401(k) plan in the private sector in 1983.

But how does the plan work? As noted above, you can elect to have a percentage set aside from every paycheck into a designated investment account. You can choose how much of your contribution goes to which investments within that account—usually mutual funds. Some employers match employee contributions up to a certain percentage, which sweetens the pot.

Like other investment accounts, 401(k)s come in two different options:

  • Traditional 401(k)s: These accounts use pretax dollars for contributions. This reduces your taxable income and, therefore, your annual tax liability. You can claim the amounts you invest as a tax deduction on your annual tax return. You are, however, liable for taxes on any withdrawals you make.
  • Roth 401(k)s: These accounts require contributions to be made using after-tax dollars, which means there is no immediate tax benefit. But any withdrawals you make end up being tax-free.

Your employer can only contribute to a traditional 401(k) account, not a Roth 401(k).

Eligibility

The eligibility for a 401(k) plan varies based on the employer. This also applies to matching contributions. In 2020:

  • 70% of employers offered immediate participation in a 401(k)
  • 20% of employers required employees to be working for at least a year to receive matching contributions
  • 54% of employers offered automatic enrollment in 401(k) plans

Match Amounts

Matching programs vary by company, sector, and even economic conditions. Some companies offer really generous 401(k) matches while others don't match their employees' contributions at all. But even those that match do come with limits, which means it isn't an unlimited amount. In other words, you can’t contribute half of your salary and watch your company match all of those funds.

According to SHRM, a survey conducted by XPertHR showed that roughly 82% of employers studied matched a portion of their employees' contributions while the remaining 18% didn't provide any matches at all. The average match by employers was 4.5%, according to Vanguard's annual report on investing behavior.

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 they could be forced into less-than-stellar investment vehicles with high management fees.

Managing Your Plan

But 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 34% of plans had somebody who would offer investment advice to their participants, but not all employees put the advice they received into action. 

Most 401(k) plans offer investors a variety of investment options. Some of the most common investment types include company stock, securities (such as stocks, bonds, and other related assets), or even annuities. But the most common options available are mutual funds. According to the Financial Industry Regulatory Authority (FINRA), most plans offer an average of 8 to 12 investment options to plan holders.

There are some surprising changes to the way people are saving. For instance, Vanguard noted that the use of target-date funds increased by the end of 2020. These are mutual funds that are structured to grow assets over a period of time. They are geared to address the needs of the investor by a particular date. As such, roughly 95% of plans now offer target-date funds with 80% of investors taking part.

An increasing number of plans offer a self-directed option, although it’s still only 20%. 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 18 investing options you have thousands, including individual stocks and bonds that don’t come with all the management fees of mutual 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.

Annual Limits on 401(k) Deferrals and Matching

All of this is good to know. But one of the most important things that people fail to overlook is the fact that there are contribution limits. These caps are set by the Internal Revenue Service (IRS) and are adjusted annually for inflation.

You can contribute a maximum of $20,500 to your 401(k) during the 2022 tax year. That's an increase from the $19,500 cap set for 2021. If you're 50 or older, the IRS allows you to make an additional catch-up contribution of $6,500.

An important point to note is that your employer's contributions (if they make any toward your plan) don't count toward these limits. But there is a cap on the combined contributions that can be made to your plan. In 2022, that limit is $61,000—up from $58,000 in 2021—or $67,500 for people 50 and older when you factor in the catch-up contribution.

What Is a 401(k) Match?

A 401(k) match is a contribution by an employer to an employee's deposits in the retirement fund. Think of it as an addition to your salary, to be paid years down the road. The employer may match all or part of each dollar you contribute up to a set maximum.

A 401(k) match is often vested. That is, if you leave the job before a certain number of years have elapsed, you'll lose some or all of the employer's contribution.

What Is a Partial 401(k) Match?

A partial 401(k) match is among the most common contributions made by employers. With partial matches, employers match their employees' contributions up to a certain percent. For instance, your employer may provide a partial match of 50% of your contributions. So if you contribute $100 to your 401(k), your company will contribute $50.

What Is Dollar-For-Dollar Matching?

Companies that provide dollar-for-dollar matches contribute the same amount of money that employees do to their plans. So if you contribute $100 per paycheck, your company would set aside the same amount of money in your account for you. But there is a limit, usually up to a certain percentage of your salary. This means if the company caps equal matches at 2%, its contributions can't exceed 2% of your salary.

What Are Non-Matching 401(k) Contributions?

Non-matching contributions are any contributions that companies make to their employees' plans even if employees don't contribute themselves. As such, they come directly from companies and not through employee payroll deductions. These are sometimes called nonelective contributions.

The Bottom Line

Don't pass up the opportunity to save for retirement if your employer offers a 401(k) plan. This is especially true if your employer matches your contributions. If you don't take it up, you'll be passing up free money. Many employers match as much as 50 cents on the dollar, on 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 advisor who won’t make money depending on the fund for which you sign up. Look for a fee-only advisor.

Article Sources
Investopedia requires writers to use primary sources to support their work. These include white papers, government data, original reporting, and interviews with industry experts. We also reference original research from other reputable publishers where appropriate. You can learn more about the standards we follow in producing accurate, unbiased content in our editorial policy.
  1. Investment Company Institute. "401(k) Plan Research: FAQs."

  2. Congress.gov. "H.R.13511 - Revenue Act."

  3. Employee Benefit Research Institute. "401(k) Cash or Deferred Arrangements," Page 1.

  4. Internal Revenue Service. "Traditional IRAs."

  5. Internal Revenue Service. "Roth Comparison Chart."

  6. Vanguard. "How America Saves 2021," Page 9.

  7. Society for Human Resource Management. "401(k) Plan Match Formulas and Automatic Features Add Value for Participants."

  8. Vanguard. "How America Saves 2021," Page 21.

  9. Vanguard. "How America Saves 2021," Page 1.

  10. Financial Industry Regulatory Authority. "Investing in Your 401(k)."

  11. Vanguard. "How America Saves 2021," Page 4.

  12. Vanguard. "How America Saves 2021," Page 64.

  13. Internal Revenue Service. "IRS Announces 401(k) Limit Increases to $20,500."

  14. Internal Revenue Service. "401(k) Plans - Deferrals and Matching When Compensation Exceeds the Annual Limit."

Take the Next Step to Invest
×
The offers that appear in this table are from partnerships from which Investopedia receives compensation. This compensation may impact how and where listings appear. Investopedia does not include all offers available in the marketplace.
Service
Name
Description