In Plain Sight: A 100% Return in Your 401k
A 100% return awaits employees with access to 401k plans with a company match. In over 20 years as an investment consultant and investment manager, I have only found one guaranteed 100% pre-tax return on investment, and that is the company match in your 401k plan.
A company match is the dollar amount that your employer contributes to your 401k account based on your salary deferral and eligibility.
There are two aspects of the match: the percentage of your salary that the match represents and the company vesting requirements. Studies show that approximately half of U.S. employers with 401k plans provide a match. The company matches typically range from 1-6% of employee contributions. Very few companies match at 6% or more.
The funds that you invest (up to the match amount) earn a 100% pre-tax return on your investment regardless of how it is invested, subject to any vesting requirements. Vesting simply means the company plan may require that you stay at the company some minimum period to earn the match.
Some 401k matching vests immediately, while others vest entirely after a period of time, which is called ‘cliff’ vesting. Cliff vesting rules require the employee to stay with an employer for a minimum number of years, or you don’t get any of the match. The last type of vesting is a gradual vesting schedule that vests a portion of the company match with every year of service until you hit 100% (usually 3-5 years).
The earlier you start investing and the more consistent you are, the larger your retirement account will be due to the benefits of compounding. How much you save is more important than which 401k investment funds you allocate to.
For example, an employee who saves 2% of their salary with an excellent investment fund selection will not have a larger retirement balance than another employee that saves 15% of their salary with mediocre fund selection.
A necessary step to successful 401k investing is capitalizing on the full company match to earn a 100% return, guaranteed.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
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