How a 401(k) match can help you build wealth and prepare for a comfortable retirement


A 401(k) match is free money your employer kicks in to help you save for retirement using investment options, assuming your employer offers a 401(k) workplace retirement plan and you agree to participate.

Here's how it works: First, you commit to contributing a specific percentage of your annual income into your 401(k). That money is automatically taken out of your paycheck, before you even see it, and diverted into an investing account. Then your company kicks in more, based on how much you put in, boosting your retirement contribution. Free money! And you'll get tax benefits.

Setting up your 401(k) is usually quick and painless. You may be presented with a few investment options to select from, in many cases index funds or mutual funds, such as the following:

  • Stock funds. Your options here may include companies of different sizes (small-, mid-, and large-cap stocks) or from different geographic regions (U.S. and international).
  • Bond funds. Options might range from funds representing a large portion of the bond market to specific regions.
  • Target-date retirement funds. These are made up of a mix of investments that changes over time, depending on when you plan to retire.

Among Vanguard plans, the typical employer match is 3% of your salary, but some companies match more than twice that, according to the investment company's How America Saves 2019 report.

The best way to make the most of 401(k) matches is to begin contributing as soon as possible, says Stephen O'Hara, a certified financial planner and vice president of Wealth Enhancement Group based in Beverly Hills, Calif.: "When you start early, even if it's a small amount, those acorns will grow."

What is a 401(k) match and how can you take advantage of it?

Video by Ian Wolsten

Formulas for 401(k) matches

Employers use matching funds as incentives to get employees to put aside more for retirement, says Carolyn McClanahan, a certified financial planner and the director of financial planning at Life Planning Partners in Jacksonville, Florida.

There are different formulas, and it's not always easy to figure out how much you need to contribute to get the full match. If you're not sure, ask HR.

Understanding employer match schedules

Just because your employer is giving you money for retirement, that doesn't mean you'll get that money right away — or that you'll get to keep it when you leave the company.

Employers can determine when they match your contributions, says McClanahan. You may have to work for the company for a few months, or even a year, before you're eligible to start receiving the employer match.

And once you're eligible, how often the company deposits matching funds into your account can vary. In 2017, about 46% of employers awarded matching funds every pay period, according to data from T. Rowe Price, while 4% paid out the match on an annual basis. In that case, if you leave the company before your matching funds are awarded, you may not receive that money.

Some employer matches also "vest" over time, meaning the company uses a schedule to determine how much of the matching funds in your 401(k) you're entitled to if you leave. Some companies use a "cliff" vesting schedule, meaning once you reach a particular anniversary, the money becomes yours to keep all at once. Others use a "graded" schedule, meaning the money slowly vests over a set number of years.

Vesting is a tool companies offer to retain employees, says O'Hara. If you leave the company before key dates in the vesting schedule, you will leave behind some, or even all, of that money.

Although this fine print is important to know about, in many cases, companies are quick to give you your match at the same time you make your contribution — and let you keep that money. That extra money can be a valuable and easy way to get on track with your retirement savings.

401(k) matches boost long-term saving

Retirement experts recommend contributing at least enough to your 401(k) to get the full employer match. Historically, about 1 in 5 employees miss out.

You'll be leaving money on the table if you don't take advantage of your employer match, says O'Hara. For example, if you make $50,000 and put in 6% of your annual salary, you'd have $3,000 saved in a year. If your employer matches 3%, you'd have an additional $1,500 — bringing your total to $4,500 saved for retirement that year.

When possible, try to boost your contributions over time, even by 1% a year. It can make a significant difference to your bottom line.

Overall, O'Hara says, saving money for retirement is the most important financial decision you can make, and a 401(k) is one of the best saving and investing tools available to workers.