7 Questions To Ask About 401k Match

August 14, 2017


Thomas J. Pietrack, CFP®

Director of Financial Planning, Portfolio Manager

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There are several components of a 401k employer match than can be coordinated to fit your personal finances. Contact your payroll, human resources or benefits department to ask for specific information on your retirement plans. Here are a few questions you should ask, and likely answers.

  1. What is the waiting period and vesting schedule for employee contributions?
  2. What sources are considered eligible compensation for the 401k match?
  3. Can I choose which compensation sources get matched?
  4. How much of my compensation may I contribute?
  5. What is the match formula?
  6. When is my 401k match received?
  7. How often can I change my 401k contribution amount?
  8. Bonus Question: What if I max-out my 401k contribution too early?
7 Questions To Ask About 401k Match, Coherent Financial Advisers

What is the waiting period and vesting schedule for employee contributions?

There may be a waiting period before you can contribute, such as 90 day or 6-month. Examples of vesting schedules are a one-year waiting period before you are entitled to the match. Or you may vest in 20% increments over 5 years (20%, 40%, 60%, 80%, 100%).

What sources are considered eligible compensation for the 401k match?

Examples include salary, regular bonuses and commissions. Spot bonuses, and sales contests often are not eligible.

Can I choose which compensation sources get matched?

If you have a choice, determine how you want to get matched. You may want to simply match your salary. Or you may want to use a combination of salary with higher or lower percentage match for commissions or bonuses.

How much of my compensation may I contribute?

Employers may allow you to contribute 25%, 50% or even 100% of your compensation into your 401k. This may be important in coordinating dual-income households to receive the optimal contribution level. For instance, one income earner makes $20,000 and wants to contribute the maximum amount.

What is the match formula?

A 100% match on 4% is an example of a simple formula. A “split match” formula gives 100% of the first 4%, then 50% of the next 2%, for a 5% total.

When is my 401k match received?

Your company may match with each paycheck, quarterly or only once a year. Profit sharing is often matched once per year. Typically, you must be employed on the date the 401k match is paid out.

Understanding when you receive your vested matching contribution is an important factor if you are considering changing roles such as from sales to management, or changing employers.

How often can I change my 401k contribution amount?

You may be able to increase or decrease your contribution percentage at any time, or only periodically (e.g. each quarter). Ask how much lead time is necessary for the change to take place. For example, if you are trying to adjust contribution percentage for your bonus ONLY, ask for the processing cut-off date for the changes going into effect.

Also ask if you can apply a contribution change to one payroll period only. If not, remember to reverse the change, to remain on track with subsequent contributions.

Bonus Question: What if I max-out my 401k contribution too early?

Ask if your employer provides a true-up contribution. The true-up contribution allows employees to receive the entire company match, as if to “forgive” the employee’s mistake of maxing-out too early. The true-up accounts for eligible compensation that would otherwise have been matched. This might happen by front-loading contributions, having uneven contributions from commissions, or earning higher compensation than expected.

 
Wishing you success,
Tom Pietrack, CFP®
August 15, 2017

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