Many employers offer benefit packages in order to appear more attractive to workers. Good benefits draw in and retain high-quality employees. Qualified retirement plans are one important part of these programs, and most people who have a day job are familiar with them. Private companies typically have a 401(k), government employers or non-profits may offer the equivalent 403(b). In this post, we will explore matching, vesting, and concentrations in qualified plans.
Some employers will match retirement plan contributions. Matching is a way for employers to improve the value of their benefits packages. Matching encourages workers to participation in qualified plans, and employers get tax benefits for contributing. And of course, employees like working for companies that help them achieve their retirement goals.
Matching is like free money. Yet some workers still avoid contributing to their plan, even with the match. Many think matching is not worth much today, so they skip adding to their retirement account. This is a mistake. While it is true that the dollar amount your employer contributes may not be large, small amounts can grow over time due to the power of compound interest. Make sure you understand your company’s program and take advantage of it. These programs can vary; here are the most common types.
1. 50% Up To 6%
This is a popular matching set-up. The employer matches 50 cents on the dollar for all employee contributions, usually up to 6% of salary.
2. Dollar For Dollar
The employer matches 100 percent of employee contributions, limited by a dollar amount of percent of employee income (up to the IRS limit). This type of program is less widespread.
Vesting refers to the way employees gain full ownership of employer contributions. It means you don’t have full ownership of employer contributions until you have worked there a certain amount of time. Many organizations use vesting as an employee retention tool, the specifics vary by company. Most employees fully vest in their retirement accounts after one to five years. Some employers offer immediate vesting after a set number of years. Others have graded vesting where workers own progressively more each year until fully vested. Most SEP and SIMPLE IRA employer contributions are vested immediately.
Some companies contribute their own publicly traded stock as part of their matching programs. Make sure you monitor your account closely if your company matches with stock. Trim any concentrations that grow too large. Concentrations can be a good way to build wealth, but they don’t always pay off. Enron employees discovered this the hard way. Holding most of your retirement balance in one stock is risky. If you have a large concentration of employer stock, consider trimming it down to 10-15% of your account balance. Then re-allocate those proceeds into more diversified assets.
Regularly adding money to a qualified plan reduces your taxable income and allows your savings to grow tax-free until retirement. Take advantage of qualified plan matching now and help build your wealth. You will be a step closer to a comfortable retirement.
Mario Favela is a freelance content writer whose specialties include small business and technology. He writes about investing and personal finance at gatorfinance.com. You can also follow him on Twitter.