Millions of Americans are missing out on a billions of dollars in free money. How, you ask? They are missing out on free money by not getting the full employer matching contribution for their 401(k) accounts. According to a new report by independent investment advisory firm Financial Engines, workers left an average of $1,336 in matching contributions on the table each year, adding up to an estimated $24 billion in lost free money. The report compiled information from the savings records of 4.4 million retirement plan participants at 553 companies.
The report found that nearly 8 in 10 eligible employees are taking advantage of defined contribution plans like 401(k) plans, but a quarter of employees are not contributing enough to their 401(k) plans to get the full company match. Most employers offer some type of employer-matching contribution for 401(k) accounts and include their contribution as part of the compensation package for their employees. If the employee does not contribute enough to get the full matching contribution, it is like handing a portion of their compensation back to their employer.
The matching contribution is one of the best benefits of employer-sponsored retirement savings plans because it gives the employee an instant return on their investment. In many cases, the employer will match a contribution to the retirement account up to 6 percent of the employee’s base salary. Different employers have different contribution amounts, so each employee should review their benefits package completely to ensure that they know the maximum amount the company will contribute to their account based on the amount they have diverted from their paycheck into the account.
Unclaimed employer matching contributions has been an issue since the companies started offering the plans years ago. Part of the problem is that more companies have instituted the automatic enrollment of employees into the retirement plans to boost participation, but the default contribution amount is not high enough for the employees to get the full amount of the matching funds. While a company may offer up to 6 percent of salary in matching funds, the default contribution is often about 2 percent of the employee’s salary. If the employee does not raise their contribution amount, they will be missing out on a lot of free money.
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