Taking Advantage of 401k Matching Plans
401k matching plans have a relatively short history, but that doesn’t mean it has a low adoption rate. In fact, Americans have open nearly 70 million 401k accounts, even though the product was invented as recently as 1980.
With the advent of 401k accounts, companies started turning away from employee-ownership and pension plans in order to reduce the risk of losing both a job and retirement with one single bankruptcy. As we have seen lately, that risk is very much reasonable, with many automakers reaching a point at which they would have, without a bailout, left a number of pensioners to make ends meet on their own.
With 401k accounts, employees can invest in any publicly traded company through a variety of different mutual funds and financial products. Retirement default risk has been spread from one company to several thousand, and companies are happy to see the results, as well. A business can now focus on employee salaries, rather than budgeting for long-term pensions.
Employer 401k Matching Plans
While employer 401k matching plans slowly disappeared through the latest financial crisis, they’re starting to make a comeback. For employers, the match presents an opportunity to reward healthy employee savings by matching employee contributions with company funds. Plus, since not all employees use their employer’s 401k matching plans to the fullest, some businesses are able to offer extensive benefits to those who will make use of it, while losing nothing to those who don’t.
That does present some difficultly, however. Since employees are less likely to make full use of 401k matching plans as they are to use their full salary, companies now have an incentive to increase employee pay, rather than provide such “back-end” benefits as a 401k match. To many still unfamiliar with a 401k, a $50,000 salary with no 401k match looks at first more attractive than a job with a $48,000 salary and a 100% match on the first 5% of income. As we know, though, the $48,000 job actually pays more when benefits are included – $400 more.
Despite a downward trend in the number of companies offering a 401k match, the benefit isn’t gone entirely, and a rebound is anticipated. As the rate of unemployment falls from recessionary peaks, employers will have to up the ante in how they recruit new employees with bigger benefits. And with more investors saving more than they ever have, the 401k match is starting to look attractive once again.
Make the Most 401k Matching Plans
Employees who are graced with 401k accounts should make the most of the match, at the very minimum. Because any employer match is applied to the first contributions, it is the smallest amount of money that sees the greatest return. An investor who earns $50,000 per year at a company with a 50% match on 6% of income would essentially save $4,500 for retirement, and it would cost him or her only $3,000 out of pre-tax pay. After taxes are considered, the instant net gain quickly rises to almost a 100% return on his or her money – not a bad ROI at all!