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Sizing Up Your 401(k) Match

Emily Brandon

Most employers that provide a 401(k) plan also give employees a 401(k) match. But the amount of these company contributions and the ease of getting them varies considerably by employer. Vanguard administered more than 225 different match formulas in 2013, according to a recent analysis of 1,900 plans with 3.5 million participants. Here's how your 401(k) match stacks up:

[See: 10 401(k) Facts Everyone Should Know .]

The maximum possible match. The most common 401(k) match amount is 3 percent of pay, which 37 percent of employers provide, Vanguard found. For someone earning $50,000 per year, a 3 percent 401(k) match is worth $1,500. Another third of employers offer matches worth between 4 and 6 percent of pay, and 7 percent give matches amounting to 7 percent or more of employee paychecks. Additionally, 42 percent of employers make non-matching or profit-sharing contributions to employee 401(k) plans, which were worth a median of 3.9 percent of pay in 2013.

Figuring out the formula. The most common 401(k) matching formula is 50 cents for each dollar contributed up to 6 percent of pay, and a quarter of employers use this formula, Vanguard found. Nearly half (47 percent) of firms require employees to save 6 percent of their pay in order to get the entire match, and 30 percent of companies require savings of 4 or 5 percent. A high savings requirement in order to receive an employer contribution makes it more difficult for some employees to get the match. For example, an employee earning $50,000 who needs to save 6 percent of pay to get a match would need to contribute $3,000 to the 401(k) plan to get the entire employer contribution offered.

[See: 10 Trendy 401(k) Plan Perks .]

Delayed eligibility. It's obviously best for employees to get company contributions as soon as possible so that the money can start accumulating in their account. But only about half (55 percent) of 401(k) plans allow participants to start saving in the plan with their first paycheck. Other employers make workers wait between two and six months (22 percent) or even a year (17 percent) before they are eligible to start contributing to the 401(k) plan. Workers often have to wait even longer to get a match. Less than half (44 percent) of employers immediately begin providing a 401(k) match to new hires, and 28 percent of employers require a year of service before employees are eligible for matching contributions. "A one-year eligibility rule is much more common for employer contributions, presumably because employers want to minimize compensation costs for short-tenured employees," Vanguard found.

Waiting to vest. You don't get to keep your 401(k) match if you leave your job until you are vested in the 401(k) plan, and just under half (45 percent) of 401(k) plans offer immediate vesting to employees. Some 401(k) plans don't allow employees to keep any of the 401(k) match until they have been with the company for between one and three years (16 percent). Other companies allow workers to keep a gradually increasing percentage of the match based on years of service, but you typically don't get to keep all of it until you have five (19 percent) or six (14 percent) years of job tenure.

[See: What Everyone Should Know About IRAs .]

The impact of automatic enrollment. When employers automatically sign workers up for the 401(k) plan, the most common default savings rate is 3 percent of pay. Employees who stick with that savings rate may miss out on the higher company contributions they could get if they saved more in the 401(k) plan. "Plan design, specifically the predominant use of a 3 percent default deferral rate, means participants in plans with automatic enrollment are saving less," Vanguard found. While 401(k) plans with automatic enrollment have significantly higher participation rates than plans with voluntary sign ups, savings rates were 35 percent lower in the plans with automatic enrollment. If you're automatically signed up for your 401(k) plan, take a look at your company's employer match formula and consider adjusting your savings rate accordingly.

Emily Brandon is the senior editor for Retirement at U.S. News. You can contact her on Twitter @aiming2retire, or email her at ebrandon@usnews.com.

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