Though 401(k) plans make it easy to save for retirement — you simply sign up to have contributions deducted automatically from your earnings — they’re not perfect. In fact, some 401(k)s charge expensive fees that can eat away at your returns, while others offer limited investment choices that may not align with the strategy that works for you.
But in general, it does pay to participate in a 401(k) plan when there’s an employer match on the table. And new data from Principal reveals that 401(k) matches have gotten a revival.
More companies are giving out free money
In the course of the pandemic, many employers had no choice but to pull their 401(k) matches as a cost-savings measure. But as of the first quarter of 2021, an estimated 40% had reinstated that match.
If your 401(k) match went away but has since come back, you have a solid opportunity to not only score some free cash but also help grow your retirement plan balance into an even larger sum. Say your employer is willing to match contributions of up to 5% of your salary, and you earn $70,000 a year. That means if you put $3,500 of your own money into your 401(k), your employer will contribute another $3,500.
Now, say you give up your match this year and don’t get that free $3,500. You may be thinking that’s no big deal in the grand scheme of your retirement savings. But let’s imagine you’re 30 years away from retirement, and that your 401(k) is invested as such that it generates an average annual 8% return. (This is not an unreasonable assumption for a retirement plan that’s heavily invested in stocks.) By missing out on that $3,500 this year, you’ll actually end up with over $35,000 less in three decades’ time. And that’s a lot of money to give up.
If you’re unhappy with your company’s 401(k) plan specifically — say, you’re not thrilled with its investment options or there’s another issue that’s bugging you — then it pays to contribute just enough money to snag your full employer match and then fund an outside account like an individual retirement account (IRA). But one thing you really don’t want to do is pass up free cash for retirement because, over time, even a small contribution on your employer’s part could grow into a sizable sum.
Of course, just as your employer may have needed to pause 401(k) matches during the pandemic, so too may it have been necessary for you to put your 401(k) contributions on pause as you grappled with your own financial setbacks. If that’s the case, and you’re not in a position to fund your retirement plan this year, don’t beat yourself up over it. You’re better off covering your near-term needs before focusing on your long-term savings. But if you are in a position to fund your 401(k), and your employer has reinstated its match, then it pays to take advantage of that free money while it’s being made available to you.