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401(k) Miss Matches

Practice Management

Employer matching contributions to a 401(k) plan is very helpful in encouraging plan participation and boosting retirement readiness. But it’s possible to blunt the match’s effect and effectiveness. 

In a recent blog post, “Missing the 401(k) Plan Match,” Shannon M. Edwards, President of TriStar Pension Consulting, discusses behaviors and actions that render an employer match less useful and less successful in achieving those goals. 

Choosing Not to Defer

The choices employees make about deferrals are one way that the benefits of an employer match can be lost. First of all, Edwards points out, an employee must choose to make a salary deferral in the first place; one of the many consequences of choosing to not make one will be missing out on the employer match. 

Not Deferring at the Full Employer Match Level 

But simply choosing to make a salary deferral is not a guarantee that employees will benefit fully from the match, Edwards suggests. Employees who don’t understand the matching contribution may fail to maximize its effect, she observes. For instance, if an employee whose employer will match a deferral of up to 4% of salary chooses to defer 3%, the employer will match that 3% and the employee will have foregone an additional 1% that could have been theirs. For example, she observes, an employee whose gross pay per paycheck is $2,000 but defers 3% and not the full 4% the employer will match will miss out on more than $500 more a year—not to mention reducing the effect of compounding on that amount over time. 

Making the Maximum Deferral Early in the Year

Even making the maximum possible deferral does not translate to the most effective use of the employer match, Edwards warns. This, she says “often comes as a surprise to everyone” and “even surprises the employer.”

Edwards points out that some plan sponsors calculate the employer match each pay period, and some calculate it at the end of the year. Depending on when the plan sponsor chooses to calculate and contribute its matching dollars, employees who contribute the maximum deferral amount ($19,500 in 2021) may miss out on some of their potential matching funds if they try to contribute all of it early in the year rather than equally out of each paycheck during the year. 

The Importance of Consistency

Edwards emphasizes that consistency is a key to saving for retirement—and to maximizing the utility of the employer match. “The key to a successful retirement savings strategy is committing first to consistent savings by deferring a percentage of your pay into a retirement plan,” she writes. “It is important to take the time to understand your employer’s plan and how the match is calculated.” And, she adds, one should take advantage of the employer match and contribute at least as much as the employer is willing to match.