The New Commonsense Guide to Your 401(k): Rebuilding Your Portfolio From The Bottom up

Chapter 26. The Match Makes the Magic

IF YOU'VE been reading along straight through this book, you remember that when Ted Benna designed the first 401(k) plan in 1981, what set it apart from a run-of-the-mill savings plan was that the employer offered a match to those employees who made a contribution. The match makes the magic. Without it, many employees would still contribute to get tax advantages. But surveys show that it is the match that is most important in persuading employees to sign up.

And it is the match that guarantees you a return on your money that you cannot get anywhere else. When you search for an investment that pays a good return, you will never find another that offers "free" money so that you have an immediate return as soon as you invest. The most common match is 50 percent of the employee contribution up to 6 percent of salary. The math on that is pretty simple: Say you earn $100,000 and you contribute $6,000 to your 401(k) plan, or 6 percent of your salary. Your employer kicks in another $3,000 or 50 percent of your $6,000, providing a 50 percent return on your money before you've made any investment at all. But what if you earn $60,000 and you contribute $6,000? Your match will be lower because you are contributing a larger percentage of your salary, 10 percent to be exact. Your employer matches half of the first 6 percent—or $3,600—making a contribution of $1,800.

In 2000, about 90 percent of employers provided a match and those companies that were changing ...