3 Shocking 401k Facts

If you blinked you might have missed the poll I had on my Instagram feed the other day (probably because the stories delete after 24 hours). It was a series of stories with these three simple questions. 

3 Shocking 401k Facts You Need To Read

  • What is the average employer match in the US?
  • What percent of employees didn’t know that their employer offers a 401k?
  • What is the average starting contribution for new employees?

Instagram is an awesome place to find your daily dose of inspiration, but what I can’t do on Instagram is deep dive into the details of these questions. So let’s take a minute and discuss the shocking answers.

What is the Average Employer match in the United States?

First, let me say, not everyone in the US has an employer-sponsored 401k plan.  Without this benefit option, your ability to save for retirement in a tax-sheltered environment is drastically curtailed. The 401k and match is such a powerful employee benefit that it should be considered as part of your overall compensation. If you are trying to decide between a job that offers a 401k and one that doesn’t, there should be a damn good reason you choose the job without the 401k.

For those without a 401k at work, you need to be investing in an IRA. This can be set up with the big three, Vanguard, Schwab, and Fidelity. If you have read this blog before, you know my personal favorite is Vanguard. The IRA is available to any adult in America with income in a given calendar year. The IRA is not tied to your employer in any way.

Okay, now to answer the question. The Average Employer match in the US is 4.7%

Honestly, this is a little higher than I would have guessed. If your employer offers a match and you are not capturing that full match, you need to drop what you are doing, like your hair is on fire and figure out how to get that free money your job is trying to give you.

Most of the time the solution is as simple as increasing your contribution to the point that you capture the match.

Here is a typical match structure:

  • The employer will match up to 50% of the employee’s contribution up to  6% of salary.

Jack makes $60,000 per year and knows he wants to get the full match. He sets his contribution to 6% thus contributing $3,600 during the year. His employer matches half of that amount and contributes $1,800. Jack just received an automatic return on investment of 50%. That is working smarter not harder.

What is the average starting contribution for new employees?

I’m going to come right out, and give you this one. The answer is 3% percent! That’s right, new employees that decide they want to take the leap and contribute to their workplace 401k settle in on the nonround, uneven, prime number of 3%.

Now, if you read the section above, you now know that in almost all circumstances this is not even enough to qualify for the full employer match.

Incidentally, 3% also happens to be the average default contribution level for employees that are auto-enrolled into their 401k plan. This is probably not a coincidence. Most employees, once enrolled in their 401k plan, seldom check on their accounts. This problem is well known by those in the financial industry and so much so that 401k administrators have tried to create ways to outsmart the employee.

One such method is the use of an auto escalate feature. Every year your contribution will increase by one percent until you reach 10%. This takes the friction out of the employee having to log into their account and increase their contributions once per year.

Author David Bach talks a lot about paying yourself first.  I was listening to him on a podcast recently and he described a new way to think about this concept. He said you should be setting aside (saving) one hour of your day’s wages to pay yourself.

If you are a Monday through Friday worker, this would be five hours per week of pay that you would set aside for yourself. Not for your house, not for your pet, and not for your car. For your future self, so that you can start to build an army of money that works on your behalf to build wealth.

Coincidentally, one hour per day equals 12.5%.

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What percent of employees didn’t know that their employer offers a 401k?

I found this little nugget of trivia absolutely baffling. 33% of employees in the US were not sure if their employer offered a 401k.

Unless you’ve been living under a rock, you should know that you are on your own to fund your retirement. Social Security, in its current form, is dying and pensions have already been issued a time of death.

Spending all that you make means you are living too close to the financial cliff. You need to build a cushion in your life so when life veers off course (job loss, illness) you have the money to get back on track.

The other shocking reality buried in this trivia question reveals that 33% of employees with the option of contributing to their 401k, did not.

If you forego contributing to your 401k, you are giving up the most beneficial tax break the US government gives to its citizens. That’s right, Uncle Sam gives you the ability to shelter $19,000 per year from taxes and even allows tax-free growth. I love this great country but I refuse to pass up free money.

Make Life Easier And Richer

It is nearly 2020 and while you were living your life, everything has gone digital. Managing your finances is no different. Nearly every 401k administrator has a smartphone app for your plan.

Using an app is so easy. You can set your account to auto log in with face ID or fingerprint ID. This removes the hassle of trying to remember your password.

The app can be easier to navigate than the web version. Changing your contribution percentage in the app is usually as easy as a couple of clicks. Keep in mind the administrators of your 401k want to make contributing as easy as possible. The more money they manage the more money they earn. These companies are continually improving their usability to make your life as easy as possible.

So if you haven’t logged on to your 401k in a while, do yourself a favor, download the app and have a look around. You might be surprised by what you find.

Feeling average?

Feeling average or even below average is normal, but when it comes to your 401k, being average is not good. The average 401k plan is a free gift that you may be passing up.

This is average:

  • The average employer match is 4.7%
  • The average employee contribution is 3%
  • 33% of workers are unsure if they have a 401k.

I hear many people say that they don’t understand how to use their 401k or that they find them difficult to understand. Here is your chance. I can help! Head on over to The Smart Fi Facebook Group and ask your questions. Let’s break down the barriers that are stopping your 401k from being above average.

Do you contribute more than 3%? What does your employer match look like? Please share with our Facebook Group.

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