How Does a 401(k) Match Work?

In July, the Washington Post published an article on how some businesses are using 401(k)s to attract new talent while simultaneously making it easier for seasoned employees to retire when the time comes. Employer-sponsored retirement plans have been an important benefit for decades, but recently companies like Microsoft are changing the way businesses think of a 401(k) match as a tool to stand out from their competition.

So, what is a 401(k) employer match? How does it work, and what benefits are there for businesses that choose to offer one? There are many forms a 401(k) match can take, so let’s take a look at the options, and how you can get started with an employer match if you don’t offer one already.

Employer Match Basics

Under an employer-sponsored retirement plan like a 401(k), the employer takes responsibility for managing a plan, but the employee is responsible for saving money, and also for managing investments within their own portfolio. That said, just over half of employers offer a 401(k) match, which involves the employer offering a certain amount of money, usually up to a certain percentage of the employee’s salary, to match what the employee contributes.1

Different Types of 401(k) Match

Depending on the employer’s goals, 401(k) match can take on a few different forms:

  •  Percentage Match: Most commonly, an employer will match an employee’s contributions up to a certain percentage of their salary. Percentage matches usually fall between 3% and 6%, meaning that the employer would contribute up to 3% or 6% of the employee’s salary, so long as the employee is also contributing that much. In this case, a 6% contribution with a 6% match would essentially double the employee’s savings rate, putting them in a better position to retire.
  • Dollar Amount: A small number of employers prefer to offer matches up to a certain dollar amount as opposed to a percentage. This option is less flexible, as it does not scale depending on an employee’s actual income versus another employee’s.
  • Stretch Match: Instead of matching employee contributions dollar for dollar on the first 5% of contributions, some employers stretch that to offering 50 cents per dollar up to 10%. The result means the same dollar amount is contributed by the employer, but employees will have to commit to a higher contribution rate for them to take full advantage of the match (though they’ll still benefit if they don’t).  

Getting Started with 401(k) Match

If you’re ready to start offering a match of your own, you’ll have a few considerations. First, think about how much you’d like to contribute. Only 10% of employers who offer 401(k) match more than 6%, but in competitive job markets, you may want to consider how contributing more could help you attract and retain the talent you need.1

Another thing to consider is your vesting schedule, which determines how soon the matching employees fully own the contributions you’ve made to their retirement accounts. It’s common to see contributions take as long as three years to fully vest, meaning an employee has to stay with you for three years for your employer contributions to really become theirs. Additionally, by immediately vesting your contributions, you could attract talent over employers who take longer to vest.

Benefits of 401(k) Match

There are many benefits to offering a 401(k) match, both for the employer and the employee.

For employers, there is a strong tax benefit. Since 401(k) match dollars are seen as compensation, they will lower an employer’s taxable income for the year, also reducing their tax liability. Also, when it comes to securing talent, 401(k) match can help employers stand out against the competition. Especially in cases where a potential hire is considering more than one offer, employer match could be what tips the scales in one direction over the other.

From the employee’s point of view, an employer match can result in significantly more compensation per year. Since that compensation is given to the employees on a pre-tax basis (with taxes taken out only when the funds are withdrawn in retirement), every dollar an employer contributes can be invested and compound over the years, resulting in greater retirement savings. Additionally, an employer match could be the incentive an employee needs to contribute to their retirement plan.

According to enrollment data that the Fisher Investments 401(k) Solutions service team collects, participation and deferral rates are often impacted differently depending on the type of match an employer will choose to use. Plans with no employer contributions score the lowest on both fronts, with average participation rates approximately 10% to 15% lower than those with a match. The greater impact was on deferral rate, where employers saw a nearly 50% increase in the amount of money their employees were contributing when any kind of match was offered.2

Ultimately, you can speak to a 401(k) service provider to discuss your options when it comes to offering an employer match. Your provider should be able to help you define your goals for your match, as well as your financial constraints, in order to reach a match style that will offer a stronger benefit to your employees while also staying within your budget.


1 Bureau of Labor Statistics 2015 National Compensation Survey

2 Fisher Investments 401(k) Solutions plan demographic data, as of 7/31/2017

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