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Understanding Employer Matching Programs

Employer Matching Programs Offer the Best Retirement Savings Deals Most Workers Will Ever See

By David Fisher

(LifeWire) - If the government offered you a $50 tax rebate, you'd take it, wouldn't you? Then why wouldn't you want to take the money your company will put into your 401(k) through an employer matching program?

After all, an employer matching program, if you're lucky enough to work at a place that offers one, is exactly the same thing -- free money.

According to the Profit Sharing/401k Council of America, an industry trade group, about 78% of 401(k) plans include some kind of employer match for employee contributions.

How Employer Matching Programs Work

Matches are seldom dollar-for-dollar, but they can be generous nonetheless.

An employer could, for example, offer to match 50% of all of an employee's contributions up to 6% of total income. A worker who makes $50,000 a year would get $1,500 from her employer simply by putting $3,000 of her own salary into the plan.

That's a 50% gain right off the bat. And, because employee contributions go in tax free -- until money is withdrawn in retirement, of course -- the deal looks even better.

More than 20% of American workers don't contribute to their plans at all, according to a council survey of 1,100 plans that have more than 7.4 million participants. Employer matches, while not required, are a way of increasing worker participation in the plan, and they are also a way to attract workers and keep them with the company.

Limitations of Employer Matching Programs

What's free, however, can sometimes be taken away.

One of the ways employers encourage employees to stay on the job is through the use of a vesting schedule.

Under federal law, a worker's contributions to a 401(k) or any other federally approved retirement plan belong to the worker and can't be taken away. But employers can take back all or part of the matching money they put in a worker's account if the worker fails to stay on the job for a certain number of years.

Getting vested in an employer matching program

There are two kinds of vesting schedules: graded and cliff.

Under a graded plan, workers gain the right to keep a little bit more of the employer's matching money for each year they remain on the job. For example, under a five-year vesting schedule, workers might become 20% vested after one year, 40% after two and so on until they have the right to keep all of the matching funds in their account. Federal law allows graded vesting systems to stretch out for up to six years.

Under a cliff plan, workers go from 0% vested to 100% after a certain amount of time has passed. Federal law caps the maximum cliff vesting period at three years.

About 44% of companies vest their employees immediately, according to a 2007 survey done by the human resources firm Hewitt Associates.

Though the money might be vested different ways, the financial advice for all plans that offer a match is the same: Contribute at least as much as you have to contribute to get the maximum match.

Anything else is like refusing to take a tax refund.

LifeWire, a part of The New York Times Company, provides original and syndicated online lifestyle content. David Fisher is a freelance writer based in Bend, Ore. In addition to 25 years as an editor and reporter, he has worked as a professional financial adviser.

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