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

There are few certainties when it comes to investing.

The stock market can seem to gyrate with little rhyme or reason, guided up or down by unpredictable news cycles and fickle investor sentiment. Average stock returns have historically trended up over long time periods, but their trajectory is hardly assured on a daily, monthly or annual basis. As the common investment disclosure goes, “Past performance is no guarantee of future results.”

Yet, according to financial advisors, there is an outlier in the realm of investing: the 401(k) match.

The basic concept of a 401(k) match is that an employer will make a matching contribution on workers’ retirement savings, up to a cap. Advisors often refer to a match as free money.

For example, if a worker contributes 3% or more of their annual salary to a 401(k) plan, the employer might add another 3% to the worker’s account.

In this example — a dollar-for-dollar match up to 3% — the investor would be doubling their money, the equivalent of a 100% profit.

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

“If you were in Vegas and every time you put $1 in [the slot machine] you got $2 out, you’d probably be sitting at that slot machine for a mighty long time,” said Elliott, a member of CNBC’s Advisor Council.

However, that money can come with certain requirements like a minimum worker tenure, more formally known as a “vesting” schedule.

About 80% of 401(k) plans offer a matching contribution, according to a 2023 survey by the Plan Sponsor Council of America.

Employers can use a variety of formulas that determine what their respective workers will receive.

The most common formula is a 50-cent match for every dollar a worker contributes, up to 6%, according to the PSCA. In other words, a worker who saves 6% of their pay would get another 3% in the form of a company match, for a total of 9% in their 401(k).

“Where else can you get a guaranteed return of more than 50% on an investment? Nowhere,” according to Vanguard, a 401(k) administrator and money manager.

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Consider this example of the value of an employer match, from financial firm Empower: Let’s say there are two workers, each with a $65,000 annual salary and eligible for a dollar-for-dollar employer 401(k) match up to 5% of pay.

One contributes 2% to their 401(k), qualifying them for a partial match, while the other saves 5% and gets the full match. The former worker would have saved roughly $433,000 after 40 years. The latter would have a nest egg of about $1.1 million. (This example assumes a 6% average annual investment return.)

Financial advisors generally recommend people who have access to a 401(k) aim to save at least 15% of their annual salary, factoring in both worker and company contributions.

That so-called free money may come with some strings attached, however.

For example, so-called “vesting” requirements may mean workers have to stay at a company for a few years before the money is fully theirs.

About 60% of companies require tenure of anywhere from two to six years before they can leave the company with their full match intact, according to the PSCA. Workers who leave before that time period may forfeit some or all their match.

The remainder have “immediate” vesting, meaning there is no such limitation. The money is theirs right away.