What Is an Employer 401(k) Match?

How a 401(k) Match Works

When setting up your employer-provided 401(k), you'll decide on a percentage of your annual compensation to contribute to the account. Typically, the money is automatically taken out of your paycheck before taxes and invested—like the gift that keeps giving.

Your employer then matches every commitment you make dollar-for-dollar, up to a specified amount, or matches a portion of each contribution you make.

• Dollar-for-dollar matching: With dollar-for-dollar matching, your employer fully matches your contributions up to a certain amount, typically a percentage of your annual pay. This gives you the most bang for your buck.
• Partial matching: With partial matching, your employer will match only a portion or percentage of the money you contribute to your 401(k), up to a certain amount.

There are also tiered plans that fully match employee contributions up to a certain amount, before partially matching additional contributions up to the limit. With any 401(k) plan structure, any contributions you make beyond your employer's limit will be unmatched.

In addition to choosing a contribution amount, you'll be asked to choose from a few investment options when setting up your 401(k). Investments can be conservative or risky, and may include stocks, bonds or a mix of various securities. To make the best choices, you'll want to consider your age, your tolerance for risk and the amount you'd like to have in the bank when you retire.

What Is a Good 401(k) Match?

According to a 2021 report by T. Rowe Price, the most common match offered by employers is 50%, up to 6% of the employee's pay. Most plans promised a match of between 3% and 5% of employee pay. The average promised match was 4.5% of employees' annual pay, with a median value of 4%.

401k Employer Match Example

Let's say your employer offers a 100% match up to 4.5% of your $50,000 pretax salary. To benefit from the full employer match, you will need to contribute $2,250 to your 401(k). Your employer matches that amount dollar-for-dollar, so at the end of the year, you have $4,500 saved for retirement, plus any additional contributions you make. Keep in mind that anything you contribute over $2,250 is unmatched by your employer.

With a partial match, your employer matches 50% of your contributions up to 4.5% of your $50,000 pretax salary. You would still have to contribute $2,250 to get the full match, but your employer would have contributed half the amount ($1,125), for a total of $3,375 at the end of the year.

How Much Should You Contribute to Your 401(k)?

How much you contribute to your 401(k) depends on your situation and financial goals. If retirement is just around the corner or you have little in savings, you may want to max out your contribution. A general rule of thumb is to contribute 10% to 15% (or up to 20% if you're 40 or older) of your pretax salary into your 401(k).

If you're young and just beginning your career, you may want to contribute a smaller amount as you can always increase your contributions over time. This could be especially true if you find that hefty retirement contributions are making it harder to meet your current financial obligations. And if you expect to have other sources of income in retirement or if you expect everyday living expenses to decrease, you may not need to set aside as much.

Keep in mind that in 2022, the IRS limits employee 401(k) contributions to $20,500 per year ($27,000 if you're over 50). Employer contributions don't count toward this limit. There is, however, a limit for employer/employee contributions combined—100% of your annual salary or $61,000 ($67,500 if you're over 50), whichever comes first.

The Bottom Line

It rarely pays to turn down free money. Your employer's 401(k) match can be one of the best ways to secure your financial future.

• Your contributions are pretax, which means they can lower your taxable income, so you may owe less in income taxes. Just remember that they'll be taxed upon distribution.
• If you change jobs, you can take the money you've contributed with you. The amount of your employer contribution you can keep depends on your vesting status.
• Automatic contributions that come directly from your paycheck make saving for your retirement effortless. Your employer may allow you to adjust your contributions at any time if you decide you want to take a more aggressive approach or scale back your contributions.

Once you set up your employer 401(k) match, it's important to also stay up to speed on other aspects of your financial health. Consider monitoring your credit to spot possible identity theft and other unexpected surprises with free credit monitoring at Experian.