401(k) Plans Have Become Even More Appealing and Here’s the Reason Why
Though 401(k) plans make it simple to save for retirement by automatically deducting contributions from your salary, they aren't without flaws. In fact, some 401(k)s have high fees that eat into your earnings, while others have limited investment options that may not match your personal strategy.
However, when an employer matches your contributions, it usually makes sense to participate in a 401(k) plan. And, according to new statistics from Principal, 401(k) matches are making a comeback.
More companies are giving away free money
As a cost-cutting strategy during the pandemic, many businesses were forced to stop matching 401(k) contributions. However, by the first quarter of 2021, an estimated 40% had re-established the match.
If your 401(k) match disappeared but has now reappeared, you have a great chance to not only get some free money but also to help grow your retirement account balance. Let's say your employer is willing to match up to 5% of your pay, and you make $70,000 per year. That means that if you put $3,500 into your 401(k), your company will match it with another $3,500.
Let's assume you don't have a match this year and don't get the free $3,500. You might believe that's not a significant deal in the larger scheme of things when it comes to your retirement savings. But say you're 30 years away from retirement, and your 401(k) is invested in a way that earns an average annual return of 8%. (This is a plausible expectation for a retirement plan with a high stock allocation.) You'll wind up with nearly $35,000 less in three decades if you don't take the $3,500 this year. And that's a significant sum of money to forego.
If you're dissatisfied with your company's 401(k) plan in particular — for example, you don't like the investing alternatives or there's another issue that's bothering you — it's a good idea to contribute just enough to get the full employer match and then fund an outside account like an individual retirement account (IRA). But one thing you don't want to do is turn down free money for retirement because even a tiny contribution from your company can add up to a significant sum over time.
Of course, just as your employer may have needed to put 401(k) matches on hold during the pandemic, you may have needed to put your 401(k) contributions on hold as you dealt with your personal financial difficulties. Don't beat yourself up if this is the case, and you won't be able to fund your retirement plan this year. You should prioritize satisfying your immediate necessities before focusing on long-term savings. However, if you're in a position to fund your 401(k), and your employer's match has been reinstated, it's a good idea to take advantage of the free money while it's still available.
