We Want Bigger 401(k) Matches - Even When We Shouldn't

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The idea of getting matching 401(k) contributions from your employer to help you save for retirement is attractive to many workers. In fact, it's such an attractive proposition that, as a recent survey found, people are willing to pay for that free money in the form of lower salaries -- even if it leaves them no better off than they would be without it.

Many people think of 401(k) matching contributions as free money, because they represent additional funds that your employer deposits into your 401(k) account to encourage you to save for your own retirement. One common example involves employers putting in 50 cents for every $1 you save, up to a certain maximum percentage of your salary, often 6 percent. That scenario adds an extra 3 percent of your salary in your retirement account if you put 6 percent into it.

A recent survey from Fidelity showed just how much workers like matching contributions. According to the survey, 43 percent of workers would rather have lower compensation if it meant having greater access to employer contributions from company matching. Moreover, only 13 percent would accept a job with no company match at all, even if the job paid more than similar jobs that did offer matching.

Fortunately for those who like employer matching, businesses have caught onto the trend. Fidelity says that 79 percent of the employer retirement plans it helps manage include some form of additional money for workers, whether it be a matching contribution or simple profit-sharing contributions that don't necessarily require a set level of participation from workers. The typical net match of 4.3 percent amounts to about $3,540 per worker each year.

Why You Should Take the Extra Pay Instead

Yet the Fidelity survey results indicated a fundamental misunderstanding about the nature of matching contributions. Specifically, the survey's question on the top offered four choices, with varying combinations of base pay and matching contributions that all added up to the same $100,000 amount. The most popular mix of base pay and match was $75,000 base and $25,000 match, with $90,000 base and $10,000 match coming in a close second.

Yet if matching contributions lead to a dollar-for-dollar drop in salary, they certainly are no longer "free" money, and you can sometimes give up more than you get. If your base pay is $100,000, you can always make contributions yourself that will bring your total annual savings to $17,500, or $23,000 if you're 50 or older. That's not quite as high as the 75/25 split that was the most popular choice in the survey, but it's more than sufficient to do a 90/10 split. Your own contributions are also excluded from your taxable income, so the tax benefits are the same regardless of whether you voluntarily make them out of your own paycheck or your employer pays them in the form of a match.

Matching contributions also come with restrictions that your own contributions don't have. Most employer contributions have vesting requirements, which means that you have to work a certain minimum period -- often three years -- or else you'll forfeit the match and any profit-sharing contributions your employer made on your behalf. By contrast, whatever you contribute is always yours to keep, no matter how long you keep your job.

Take What Your Employer Gives You

Of course, most of us don't have a say in deciding whether to get higher salaries or a 401(k) match. If your employer offers matching contributions, then it still makes sense to take maximum advantage of the extra money it means for your retirement. Just keep in mind that if you're job-hunting, getting access to an employer match might not be worth taking a smaller salary.

Dan Caplinger is a Motley Fool contributor and retirement expert. For more on ensuring a comfortable retirement for you and your family, see our free report in which Motley Fool retirement experts give their insight on a simple strategy to take advantage of a little-known IRS rule to boost your retirement income.

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