For years, the sage advice has been to take advantage of your employer’s 401(k) retirement savings program, especially if the company matches your contribution.
Not doing so means you’re leaving money on the table.
So how much are you giving up? Plenty.
In fact, workers are probably leaving $24 billion a year in unclaimed 401(k) company matches, according to a study by Financial Engines. And no, that’s not a typo.
The company, which provides retirement advice to employees in 401(k) plans, examined the saving records of 4.4 million retirement plan participants at 553 companies. It found that 25 percent of employees miss out on receiving the full company match by not saving enough.
“The typical employee failing to receive the full match leaves $1,336 of potential ‘free money' on the table each year, which equates to an extra 2.4 percent of annual income not received,” Financial Engines said.
Using a return of 4.5 percent a year and factoring in compounding, the company figures that free money could amount to as much as $42,855 over 20 years.
“Many people might simply be unaware of the benefit, which demonstrates why it’s important to communicate it and how much money could be at stake,” said Greg Stein, director of financial technology at Financial Engines. “Many people just feel that they can’t save more.”
Not surprisingly, the employees most likely to miss out on the company match are lower-income and younger employees.
“For example, 42 percent of plan participants earning less than $40,000 per year do not take full advantage of the employer match, compared to just 10 percent of employees earning more than $100,000 annually,” Financial Engines said. “Likewise, employees under age 30 are approximately twice as likely to miss out on the employer match compared to employees over the age of 60.”
Yet for younger workers, the company match may have the biggest impact because they benefit from the investment growth on those dollars over time.
“If you can’t afford to save enough to get the full match today, increase your savings rate when you get your next raise and each raise thereafter until you reach your 401(k) contribution limit,” Financial Engines said. “Or sign up for automatic escalation of your savings if your employer offers this.”