Is YOUR company 401(K) unfair? 'Free money' from employer contributions mainly benefits highest earners, landmark research reveals

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The 401(K) status scheme is designed to thief workers build a nest ovum by putting money speech from their salary cheque each month.

On apical of this, they tin person other money from their employer done a match. 

But caller investigation suggests that these employer contributions are chiefly benefitting nan highest earners. 

Employers contributed $212 cardinal to status plans - astir 58 cents for each dollar that participants saved - according to latest information from 2021. 

But immoderate 44 percent of these costs went to nan apical 20 percent of earners, according to analysis from Vanguard Group. 

The lowest earners, meanwhile, received conscionable 6 percent of nan 'free money' from institution matches, it found.

Research by Vanguard Group suggests 401(K) employer contributions are chiefly benefitting higher earners

It is not astonishing that a greater stock of employer matching dollars goes to those who are paid more, nan study said, fixed that matching contributions are typically fixed arsenic a proportionality of salary.

But it suggests that those earning nan astir person a larger stock of contributions than their stock of income.

The lucifer formulas companies usage vary. 

Some firms lend a group magnitude each year, for illustration 3 percent of pay, sloppy of whether nan worker contributes. 

A mini number of companies lend up to a dollar headdress - for illustration offering a 10 percent lucifer connected 6 percent of pay, taxable to a limit of $6,000.

But nan astir communal lucifer formula, according to Vanguard, is simply a percent match. 

Typically, this will beryllium half of a worker's contributions up to 6 percent of their pay. 

When nan employer publication is based connected percent of pay, those pinch higher incomes typically person more. 

But apical earners besides person a larger stock of 401(K) matching dollars than their stock of income, nan study showed.

On average, those successful nan apical 20 percent income bracket received 39 percent of nan income, but 44 percent of their employer's 401(K) contributions. 

Those successful nan bottommost 20 percent of earners, meanwhile, person a 29 percent smaller stock of matching dollars than income, Vanguard recovered done study of complete 1,000 plans betwixt 2013 and 2022. 

Matching dollars often exacerbates salary inequity, said Fiona Greig, world caput of investor investigation and argumentation astatine Vanguard Group

Matching dollars often exacerbates salary inequity, Fiona Greig, global caput of investor investigation and argumentation astatine Vanguard Group, told The Wall Street Journal. 

One of nan reasons higher earners person a higher magnitude of employer contributions is because they are much apt to participate successful 401(K) plans and gain capable to get a afloat matching contribution. 

Of nan 10 astir celebrated matching formulas, each but 1 disproportionately rewarded nan apical 20 percent of earners pinch a higher stock of matching dollars than income. 

The study suggests that those earning nan astir person a larger stock of contributions than their stock of income

The look which is nan champion for much arsenic distributing employer contributions is erstwhile nan costs are capped astatine a dollar amount, Vanguard found. 

Using a dollar headdress formula, nan apical 20 percent of earners received astir 33 percent of nan matching contributions, compared to 35 percent of income.

Costco, for example, matches 50 percent of workers' yearly 401(K) savings up to a $500 cap. 

The maximum workers tin save into a 401(K) for 2024 is $23,000 - according to guidelines group retired by nan IRS - and $69,000 for mixed worker and employer contributions. 

Those complete 50 tin besides adhd an further $7,500 successful catch-up contributions.

The Vanguard investigation lays bare nan disagreement astatine nan bosom of status successful nan US.

Research from Fidelity Investments earlier this period revealed a beardown banal marketplace intends location are now more 401(K) millionaires than ever before.

The number of seven-figure 401(K) accounts roseate to 485,000 successful nan first 4th of this twelvemonth - up 15 percent from nan erstwhile quarter. 

A twelvemonth ago, location were 340,000, according to nan finance firm. 

Meanwhile, abstracted investigation earlier this twelvemonth recovered a record number of Americans took money retired of their 401(K) plan successful 2023 for a financial emergency - arsenic precocious ostentation continues to deterioration distant savings for many.

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