A 401(k) match is one the ‘rare guarantees’ in investing, CFP says

There are few certainties when it comes to investing.

Led by unpredictable news cycles and fickle investor sentiment, the stock market moves seemingly without rhyme or reason. Historically, average stock returns have trended upward over long periods of time, but their daily, monthly, or yearly trajectory is difficult to determine. As common investment disclosures say, “Past performance is no guarantee of future results.”

However, there is one anomaly in the investing world, according to financial advisors: 401(k) matching.

The basic concept of a 401(k) match is that the employer will match contributions to a worker's retirement savings, up to a cap. Advisors often refer to contests as free money.

For example, if a worker contributes 3% or more of his or her annual salary to a 401(k) plan, the employer may add an additional 3% to the worker's account.

In this example – with a dollar-for-dollar match of up to 3% – the investor's money would be doubled, equivalent to a 100% profit.

Kamila Elliott, a certified financial planner in Atlanta and co-founder of Collective Wealth Partners, said matching is “one of the rare investment guarantees we have.”

Elliott, a member of CNBC’s advisory board, said: “If you were in Las Vegas and every time you put $1 into (a slot machine), you would get $2 out of the slot machine, you could be sitting in front of the slot machine for a long time. .

However, the money may come with certain requirements, such as a minimum worker tenure, more formally known as a “vesting” schedule.

About 80% of 401(k) plans offer matching contributions, according to a 2023 survey by the American Council of Plan Sponsors.

Employers can use various formulas to determine what their respective workers will receive.

The most common formula is to match 50 cents for every dollar a worker contributes, up to a maximum of 6 percent, according to the PSCA. In other words, a worker who saves 6% of his salary will receive another 3% in the form of a company match, for a total of 9% of his 401(k) benefit.

“Where else can you get a guaranteed return on investment of more than 50%? No,” according to Vanguard, 401(k) administrator and money manager.

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consider this example Employer match value analysis from financial firm Empower: Let's say there are two workers, each making $65,000 a year, and qualifying for an equal employer 401(k) match of up to 5% of salary.

One person contributes 2% to their 401(k), qualifying them for the partial match, while the other saves 5% and gets the full match. After 40 years, the former worker will have saved approximately $433,000. The latter will have reserves of about $1.1 million. (This example assumes an average annual return on investment of 6%.)

Financial advisors typically recommend that people who qualify for a 401(k) plan save at least 15% of their annual salary, taking into account worker and company contributions.

However, the so-called free money may come with some strings attached.

For example, so-called “vesting” requirements could mean that workers must stay with the company for a few years before the money is fully theirs.

According to the PSCA, about 60% of companies require a tenure of two to six years before leaving the company with a full match. Workers who leave before this time period may lose some or all of their matches.

The rest have “immediate” vesting, which means there is no such restriction. The money is theirs immediately.