How An Employer Match Boosts Savings
Part four in a series with videos that teach older kids about money:
An employer matching contribution to your retirement account is the closest thing out there to free money. (It's not actually free; it's part of your work compensation.) But you'll forfeit this money if you do not participate. Most big employers offer matching contributions, though in different proportions (often one-to-one, up to certain limits). An employer match generates far higher returns and faster accumulation of retirement savings.
Understanding how to take full advantage of your 401(k) plan with an employer match is one of five core competencies needed to reach financial security, according to researchers at the Financial Literacy Center. You can talk to your young adult kids about signing up for their 401(k) plan, or show them this video:
Or invite them to read this narrative:
Matt and Josh work at a company that holds a lot of tedious meetings but offers some great perks, like delicious lunches during those meetings. They like free stuff, especially good free stuff like the lunches on meeting days. They like free money even better than free food, so when the coworkers found out that their company matches their 401(k) contributions, they had to take advantage of it.
Their employer provides one-to-one matching of employee 401(k) contributions, up to $2,000 a year. For every dollar up to $2,000 that Matt (or Josh) puts in his 401(k), his company puts in a dollar too. It's like an "invest a dollar, get one free" deal. Just like the buy-one-get-one free deals at the deli across the street.
So, if Matt invests $2,000 of his own money in a 401(k) account, then the company puts in the same amount: $2,000. That would be $4,000 in his account because the company matches every dollar. It's like Matt is getting a 100% return on his investment. Twice as much gets invested and twice as much grows in his account.
At Josh's old job, the company matched 50% of employee 401(k) contributions. His old employer would add half of what Josh put into his 401(k). If he invested $1,000, they'd add $500, bringing his account up to $1,500. That's not as amazing as a one-to-one-match, but it's still a lot of money.
Where Josh and Matt work now, there's something called a vesting schedule. They're fully vested after 3 years. That means that after working at the company for 3 years, employees get to keep the entire amount of the employer match in their 401(k) account, even if they leave the company. But no matter what, money that Matt or Josh or any other employee invests in a 401(k), out of their salary, always belongs to the employee. Even if they get fired or decide to leave the job before being fully vested, an employer can't touch the money an employee contributes.
Basically, employer matches are like free money. But if you don't invest in your 401(k), you don't get the match. And if you don't invest the full amount that's eligible for the match, it's like leaving free money on the table. For their part, Matt and Josh aren't trust-fund babies. They can't afford to pass up free money. That's why the buy-one-get-one-free sandwich deal at the deli across the street is their favorite spot to go for lunch.
Research shows that these simple devices -- a video or narrative (both prepared by the Financial Literacy Center) -- will have a lasting impact on the financial knowledge and behavior of young adults who view or read them.
Photo courtesy Flickr user rmgimages
More video and narratives to share with kids on MoneyWatch:
- How Compound Interest Boosts Savings
- How Diversification Decreases Risk
- How Inflation Diminishes Savings
- How Tax-Advantaged Accounts Build Assets
- Top 5 money lessons for older kids
- Top 7 gifts for teaching young kids about money
- Top 7 Gifts for Teaching Older Kids About Money