The promise of free money is usually quite attractive. After all, millions of people are rejoicing now that President Joe Biden has finally announced mass student debt forgiveness.
So why, then, are 1 in 10 working Americans missing out on thousands of free cash that has been available now and for a long time?
A 401(k) match from your employer is the closest thing many people get to free money, and studies show that millions are losing out.
That’s one of the reasons why the Strong Retirement Guarantee Act of 2022 – also known as the Safe 2.0 Law – passed the House by an overwhelming vote of 414-5 in March. Among other things, the law will require most employers to automatically enroll workers into their retirement plans.
Still, it will be a year or more before this rule takes effect, and existing 401(k) plans will be exempt. Here’s how to be proactive and get the money you’re owed now.
do not miss
Millions don’t max out their 401(k) game
A 401(k) match is a common program that makes your company double everything you contribute to a workplace retirement account, up to a certain limit.
This benefit is part of your compensation package when you get a job, so if you don’t make the most of it, it’s like you’re not getting part of your salary.
Let’s say you earn $60,000 a year and your employer offers a dollar-for-dollar match of up to 6% of your salary. That means the most your employer will give you is $3,600 a year.
But if you only put $2,000 on your 401(k), your employer is only putting $2,000 — and you’re leaving $1,600 on the table.
Opportunities like these don’t come along often in life, yet 17.5 million Americans are guilty of not taking advantage of the full offer they receive, according to a MagnifyMoney survey.
How will the Secure Act 2.0 change things?
It’s not as if saving for retirement isn’t important to Americans, with 71% of people calling “living comfortably in retirement” an important life goal in a 2022 Principal Financial Group survey.
However, about half of Americans are not confident that their savings are sufficient or are not confident in their retirement planning.
Under the Secure Act 2.0, workers would automatically be enrolled in a 401(k) at a contribution rate of 3% of their salary. Assuming you do not opt out, the contribution rate would increase by 1% per year until it reaches a maximum of 10-15%.
The legislation would also expand what you can do with your 401(k) contributions, and many employers are buying.
A survey of more than 360 employers by business consulting firm WTW found a 38% plan to allow employees to divert their contributions to things like reducing student loan debt, increasing emergency savings or supplementing a savings account. health insurance – all while still receiving mail from the company in these amounts.
About 28% of employers surveyed also plan to increase their plans, doing things like increasing the amount of automatic deferral.
Why don’t people contribute more?
The Principal survey says that 62% of workers list employer contributions as one of the top criteria for reaching their retirement goals.
But when it comes to knowing about and contributing to 401k plans, the MagnifyMoney survey shows that a small number of respondents say they don’t understand how 401(k) retirement plans work (6%) or don’t know if their company offers a match. (17%).
Some employees (12%) say they want to wait until they’re older to contribute. But, as any financial expert will tell you, contributing as soon as possible is critical, as it gives your investments more time to grow.
The biggest reason employees don’t make the most of it is accessibility; over a third of MagnifyMoney survey respondents say they simply cannot contribute as much as they would like. This makes sense, especially at a time when many families’ budgets are being stretched to the breaking point.
How to get the most out of it
When so much money is on the line, you’ll want to set up a conversation with your HR representative right away.
Prioritizing your 401(k) over other savings and investment options is usually a smart move, at least until you maximize your business match.
One exception might be setting up your emergency fund – in a crisis, withdrawing money from a 401(k) early can trigger expensive fines.
If you have enough money to spare, your first step should be to set up automatic withdrawals from your salary. A “set it and forget it” approach will ensure you get the maximum match.
Keep in mind that the new legislation means you may have several options for what you do with your contributions in the future.
Remember that you can always invest more than your employer will match. And since these automatic withdrawals usually come from your pre-tax income, you won’t have to pay taxes on your contributions.
what to read next
This article provides information only and should not be construed as advice. It is provided without warranty of any kind.