some explain this.. I dont understand this advice (401k)

[dgcoupe]

Some 403(b) plans and many 401(k) plans offer an employer match. Formulas vary, but the most common is to match the first 3% of your salary that you contribute at 100% and the next 2% of your salary at 50%. So if you put 5% of your salary into the company's plan, your employer will give you an additional 4% of your salary.


why not match it 100% at 5%

[minnie1928]

I more commonly see 50% match up to your first 6% contribution. This scenario encourages the employee to contribute at a higher rate than if the plan was 100% of the first 3% contributed.

[greenskeeper]

Some 403(b) plans and many 401(k) plans offer an employer match. Formulas vary, but the most common is to match the first 3% of your salary that you contribute at 100% and the next 2% of your salary at 50%. So if you put 5% of your salary into the company's plan, your employer will give you an additional 4% of your salary.


why not match it 100% at 5%

this would cost the company more money?

[maat55]

The main reason a company offers a 401k is to attract(through offering an investment program) employees and entice them to stay using the vesting process. Some wages might surpass the 16,500 limit if they were 5% on 100% of income.

[disneysteve]

Formulas vary, but the most common is to match the first 3% of your salary that you contribute at 100% and the next 2% of your salary at 50%.

Actually, I believe the most common formula is to contribute 50% of the first 6% of your income that you contribute. So you put in 6% and they give 3%. I'm not sure how that came to be the norm. I imagine there is some tax basis to it. I guess the point is to encourage you to participate while not costing them too much money.

[dgcoupe]

still not understand the point.. I thougth rule of thumb was to always match the maximum that your job offers on the % of contribution that they will match?

[disneysteve]

still not understand the point.. I thougth rule of thumb was to always match the maximum that your job offers on the % of contribution that they will match?

I'm not understanding your question.

[krantcents]

Most plans offer a % match to a % limit. For example, a 50% match up to 6% of you salary. To maximize the match, you would have to contribute 6%. Is that clearer?

[Seeker]

still not understand the point.. I thougth rule of thumb was to always match the maximum that your job offers on the % of contribution that they will match?

dgcoupe --

Companies strive to save monies wherever they can; thus to offer 100% match on everything is more costly; ie. in your example 100% of the first 3%, then 50% of the next 2% contributed, instead of doubling your contribution.

http://www.grantthornton.com/staticfiles/GTCom/Tax/CBC%20files/401kMatchingFollowupSurvey.pdf

By the same token, they do this to be competitive and retain employees. Part of the benefits. But they can also take away this benefit at will, and some companies will do that too.

---
Here's how I see it:

Ultimatly, you have the choice. You have the option to contribute 100% of the matched amount... ie 3% in your example, and the additional 2% you can go outside the employer venues, BUT the chances are that unless you can find a venue for achieving a 50% match on the additional 2% of monies, you are still better off getting 50% of a "guaranteed" match instead of none at all.

Essentially you get more "guaranteed" investment than by not taking advantage of the company partial match.

[cicy33]

I just got a new job and am lucky, they are matching 100% but also if I don't put in, they still are on my behalf. so that is cool. course I have to wait a year. but that's okay.

[jpg7n16]

I agree with Minnie and DS, the most common is 50% match on first 6%.

Usually employers give partial bonuses like 50% of the first x% in order to get the employees to contribute as much as possible. The more that the regular employees contribute, the higher the Highly Compensated Employees (HCEs) can contribute.

Under federal law, HCEs are usually prohibited from contributing above certain thresholds that are based on the % contributed by the average employee (there are these tests that they have to pass). So if the average employee contribution is 3%, HCEs would be restricted to contributing less than if the average employee contribution were 6%.


The common question is then, would you rather offer 50% of the 1st 6%, or 100% of the first 3%?

While the 100% match would increase # of participants, the 50% would increase the average size of the particpants contriubtion. Each of those metrics affects a different calculation for federal eligibilty standards. And each firm generally chooses what is in the best interest of the HCEs, or the option to keep the plan legal.


So it looks like your firm is trying to do both - increase the # of overall participants (by offering 100% of the 1st 3%) as well as increase the size of those participants contributions (by extending the match up onto 5%)

[Seeker]

401khelpcenter.com - Benchmark Your 401k

This site seems to confirm that most plans are of the employer will match 50% of the first 6% of the employee contribution.

I guess I'm fortunate in that my employer seems to follow OP's option somewhat: I get 100% on the first 3% contributed, plus a 50% match on the next 3% contributed.

I'm not too sure what the OP is askign either, since it appears that s/he may be under conflicting info.

401k advise is what exactly when there's a mixture of matching contributions? And yes I'm asking.

If you get from the company a 100% match on the first 3% contributed and 50% match on the next 2% contributed (OP's question)... do you choose to contribut 3% of your salary to the 401k plan offered by your company, or do you contribute 5% of your salary to the company 401k plan even though his/her net employer contributions is a bit less than a true doubling 4% in OP's case (and 4.5% in my case).

What do the professionals advise contributing, the whole that is matched even though some portion is matched at 50%, or do the professionals advise contributing only the portion that is matched 100% ????

I think, and i may be misreading the question as well, but I think that this is OP's question.

[MonkeyMama]

Usually, taking all of the match possible is what is advised. Whether it's matched at 100% or 50%, it's "free money."

The ERISA laws are rather complex and convoluted. Like tax law, the legalities have to be made ten times more complicated than they really need to be. Thus, employers have to offer to "match 100% of the first 3% and 50% of the next 2%," or however they word some of these things. Employers will choose the match that makes the most sense for their own situation, but are limited within certain legal guidelines.