Understanding Matching Contributions in Your 401k

When you begin working for a new employer you may be faced with the option to contribute to a 401k. If you do choose to contribute, you face further questions about how much you would like to contribute and understanding employer matching contributions. The most straightforward answer to how much an employee should contribute in their 401k is up to where the employer no longer matches contributions. 

401k Summary Plan Descriptions and Contributions

A problem some employees run into is understanding exactly what the employer contribution is in their account. To find the answer to this question, you first need to locate your employer’s Summary Plan Description (SPD). The SPD will have all the details you need to make your decision. 

The language used in SPDs may be a little confusing when you try to understand your employer contributions. The main reason for this is many descriptions of employer contributions reference two separate percentages that refer to different numbers. 

For example, a typical 401k employer contribution might say something like: 

“the employer will make matching contributions of 100% on the first 3% and 50% on the next 3%”. 

In this case, the “100%” and “50%” refers to the percentage of the match. Another way of saying a “100% matching contribution” is “a dollar for dollar match”. A 50% match means that for every dollar you contribute, the employer pitches in 50 cents.  

The 3% in the example refers to your salary. So if the employer makes a dollar for dollar match on your contributions for the first 3% of your salary, they will pitch in 50 cents for every dollar from 3% – 6%. After that, your employer will no longer make matching contributions (in this example).

So if you wanted to contribute up to that point where you have received the full match, you first have to calculate what percentage of your salary your employer will contribute to. In our example above, the employer contributes 100% on the first 3% of your salary, and 50% on the next 3%. This means to get the full match in your employer’s 401k, you will need to contribute at least 6%. It also means that if you do contribute 6%, your employer will be contributing 4.5%.

Flat vs. Matching Contributions

You should also understand that, the above example refers only to matching contributions. This means you have to contribute to get a match. There’s no matching contributions if you don’t make any contributions and there are no matching contributions above your rate of contributions. This is important if your employer makes a flat contribution. These contributions are usually expressed as a percentage of your salary and your contributions will not raise or lower flat contributions. These types of contributions come in different varieties but you may see them referred to as “profit sharing contributions” or maybe “safe harbor” contributions.

Why only contribute up to the Match?

There are several potential benefits to only contributing up to the match in your 401k. First, it gives you an opportunity to contribute to a Roth IRA outside of your company’s 401k. This is especially beneficial if your company doesn’t offer a Roth feature in your 401k. Second, it may be cheaper to invest outside a 401k than inside a 401k depending on the fees in your 401k. Third, you will have more investment options outside a 401k. Lastly, it may be easier to access your savings in an emergency outside of your 401k.

Contributing up to the match in your 401k is important because contributing anything less than the match is the same as taking a pay cut from your employer; you’re leaving money on the table. You may not want to contribute to your 401k if you have more pressing needs such as lacking an emergency fund or serious cash flow issues. But absent those issues, it rarely makes sense not to take full advantage of your employer’s offer.

But once you’ve taken advantage of every penny that your employer will give you, it’s time to think about other options. Contributing up to the match is unlikely to be adequate if you want to retire at a decent age and with the same or improved standard of living. Therefore, you should explore ways to increase your savings as a percentage of your income, outside of your company 401k.

Opting Out: Qualified Automatic Contribution Arrangements

Recall that when you start a new job and your employer asks you whether you want to participate in the company 401k or not, it’s called “opting in”. Opting in to an employer 401k lets you choose to participate or not. On the other hand, some plans do the opposite; the employer only asks if you would rather not participate in the 401k. This is called “opting out”. 

These plans are attractive because they increase employee participation in plans, i.e. it’s easier to not opt out than to opt in. This becomes important for large companies especially so their plans don’t become disqualified.

If you have an “opt out” style plan, also called a Qualified Automatic Contribution Arrangement (QACA), it’s likely your employer contributions look something like this:

  1. Your employer will match your contributions 100% up to 1% of your salary, and then 50% up to 6% of your salary.


  1. Your employer will make a flat 3% contribution

Sometimes these styles of plans will include features that automatically increase employee contributions by 1% each year. If you have one of these types of plans it’s important you know how they work. Just like any other 401k, the details can be found in the SPD.


If you have access to a 401k, the best thing you can do is locate your Summary Plan Description (SPD) and figure out exactly what you are entitled to. For maximum flexibility and efficiency, contribute up to your employers match, and contribute any dollars above that amount to an outside retirement account such as a Roth IRA.

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