Aside from health insurance, the 401(k) plan is arguably the best employer-provided benefit. Under this plan, employees elect to have a specified amount of their pre-tax wages placed into an investment account. In certain cases, the employer may match all or part of the employee’s contributions by depositing additional money into the plan.
Employees may select from a variety of investment options included in a 401(k) plan. They usually include assorted mutual funds comprised of money market investments, stocks, and bonds. Employees determine the mix of funds into which their money will be invested. They then designate either a certain dollar amount or percentage of pre-tax income to be withdrawn from each paycheck.
The employer matching contribution on a 401(k) plan is essentially “free” money. It is important to review the details of the employer’s matching provision in order to get the maximum possible match amount. For example, if a company matches 50 cents on the dollar up to a maximum of 6 percent of an employee’s salary, it is recommended that the employee contribute 6 percent of salary to the plan.
The matching provisions may also stipulate that the employee will not be fully vested in the match for several years. Read this area of the plan carefully, because any caveats could mean that employees leaving a job may not be entitled to take the full match with them. It may behoove an employee to stay with the company an extra year or two longer than planned, in order to have the entire employer match.
Not taking advantage of the maximum employer match in a 401(k) plan can result in an employee losing tens of thousands of dollars over time. Many companies have suspended or eliminated the matching provision of these plans due to the state of the economy. Therefore, if your employer still offers the match, consider it a bonus and start taking advantage of it.