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3 Ways You Can Lose the Free Money of a 401(k) Match

The typical employer 401(k) match can give you about $1,680 extra per year based on Bureau of Labor Statistics averages for income and company matching percentages. Allowed to grow for a few decades, that money could easily end up worth tens of thousands of dollars. But it's not a guarantee. You may be eligible for a 401(k) match, but you need to avoid the following mistakes if you want to keep yours.

1. Not contributing to your 401(k)

Most employer matches require you to put money in your 401(k) first. Then, your employer matches either all of your contributions if it's a dollar-for-dollar match, or a portion of them if it's a $0.50-on-the-dollar match, up to a certain percentage of your annual income. That means the real value of your match depends on how much you earn in a year and how much you contribute to your 401(k).

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Contributing nothing is usually a bad idea unless you need every dime you earn for your living expenses. You're just passing up free money, and once the year is over, there's no way to recoup that lost match. Aim to contribute at least enough to your 401(k) annually to get your full match so you don't miss out on what is essentially a salary bonus.

2. Leaving your job before you're fully vested

Some companies allow you to keep your employer-matched funds as soon as you've earned them, but this isn't the norm. Most companies have vesting schedules, which dictate how long you must work for a company before you're allowed to take your employer match with you if you leave.

There are a couple of different types of vesting schedules. A cliff vesting schedule requires you to work for your employer for a certain number of years before you are allowed to keep any of your employer match. Quitting before this point costs you everything your company has given you thus far. Your personal contributions are always yours to keep.

A graded vesting schedule releases your employer contributions to you gradually over time. You might get to keep 20% of your employer match if you leave the company after one year, 40% after two years, and so on. Again, this doesn't affect your personal contributions to your 401(k).

You don't have to worry about a vesting schedule if you've been with your company for more than six years or so, but if you're new and you don't plan to stick with the company long term, make sure you understand how leaving could affect your retirement balance. Ask your plan administrator or your company's HR department if you don't know what your vesting schedule is and try to stick it out until you're fully vested.

3. Paying too much in fees

All 401(k)s charge fees, but they're highly variable depending on what you invest in, how large your company is, and how much your employer covers. You want to keep your costs as low as possible so more of your savings -- and your employer match -- goes toward your retirement.

You can check your plan summary for information on some of your 401(k) fees, and your prospectus should tell you about your investment fees. If you're at a loss as to where to find this information, talk to your company's HR department or your 401(k) plan administrator.

You may not have much say over your plan's administrative costs, but you can control your investment fees to an extent by choosing your investments carefully. Try to keep these fees under 1% of your assets per year if you can. Index funds are one option to consider. They offer instant diversification and, because they track a market index, there's little fund turnover. That means less work for fund managers and lower fees for you.

Talk to your employer if your plan doesn't have any affordable investment options. The company may be willing to add some other choices if you're interested. It doesn't have to, but it never hurts to ask.

Saving for retirement is a massive undertaking, often requiring over $1 million. Your employer match can help you toward that goal, so make sure you avoid the above mistakes. Once you've gotten your 401(k) match for the year, you can re-evaluate and decide if a 401(k) is the best place for the rest of your savings. If you don't like your plan's fees or investment options, an IRA could be a better option. But if you prefer to manage all your funds in one place, stick with your 401(k).

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