It should come as no surprise that most participants contribute to the level of the company match. In fact, a 2011 study by Fidelity Investments of 1,000 current and retired workplace plan participants found 92% of current workplace participants indicated they chose to participate in their 401(k) because it is important or very important not to lose out on company-match dollars. Generally speaking, that is viewed as a positive sign that workers understand the mechanics of the match, appreciate its value, and recognize its importance in retirement savings.
Illustration by JooHee Yoon
However, a number of industry surveys show that most people contribute to the level of the employer match—and no more. In fact, data from the Employee Benefit Research Institute suggest that younger and less-highly paid workers are even more likely to pattern their savings rate on the rate of employer match—which could be a particular concern in times when employers have had to take a hard look at their matching contributions (although the 12th Annual Transamerica Retirement Survey released last year found that 51% of companies that recently decreased or suspended the match plan to reinstate it within the next two years).
With all the natural emphasis on the "free money" from the company match, some workers may assume that the match level is the maximum they can contribute. Or perhaps they assume the employer has set the match at the "right" level for them to save. However, multiple studies have shown that participants are unlikely to save enough money to reach retirement goals with a net 9% annual contribution rate (combining participant deferrals and employer match).
Whatever the reason for the confusion, this month’s Know How reminds participants that they may be able to save more than they are—and hopefully spurs them to reconsider their current savings rate as they review 2011 year-end statements and make their savings plans for 2012.