Sharing from Morningstar.com. There’s some good news for workers participating in company 401(k) plans – employer matching contributions are on the rise, and saw the highest year-to-year jump in 2016 since 2007. While the average employer contribution percentage is only a mere 4.6%, it appears that companies are trying to do their part to encourage employees to save more for retirement by upping the amount of “free money” available. So if your employer happens to be one that is raising their matching contribution limits, whenever possible make sure you likewise increase your contribution percentage to capture every dollar they’re willing to give you.
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The average company contribution to 401(k)s rose to an estimated 4.7% of employee salaries in 2016, up from 3.9% in 2015, according to data on 1,900 workplace retirement savings plans run by fund giant Vanguard Group. It was the highest percentage and biggest year-to-year jump since at least 2007.
Here’s why this is happening: Some companies in certain industries say they need to spend more to retain the best employees and motivate staff. They also need to ensure that older, relatively expensive workers can afford to retire on time and make way for younger staff. Employees who don’t have adequate nest eggs will stay in their jobs longer and add to a company’s overall health-care costs.
The boost in contributions represents a policy shift for American companies that embraced tax-deferred 401(k) plans partly because the savings tool allowed them to shift the burden of paying for retirement to employees. Many shed more expensive defined-benefit pension plans that guaranteed employees a certain percentage of their salary in retirement.
Companies tried to encourage more 401(k) savings over the past decade by automatically enrolling workers in the plans and boosting the amount employees set aside each year unless they opted out.
But many U.S. workers still aren’t saving enough on their own. The average percentage they set aside among Vanguard-run retirement accounts has dropped since 2007 largely because more new 401(k) savers were enrolled at lower initial savings rates. The average total employee and company contributions to workplace savings plans among workers who participate, as a result, haven’t moved above 11% of salaries for at least a decade.
Many retirement plan advisers say employees need to save about 15% of their salaries each year.
“If you want people to retire at a certain time they need to have acquired sufficient assets,” said Jean Young, a senior research analyst at the Vanguard Center for Investor Research. “There’s a growing interest among some employers in supporting that dynamic,” with more money, she said.
The added contributions by some companies are a stark change from the depths of the financial crisis when many employers suspended or pared back contributions. The prolonged economic recovery in the years since has put many companies on more stable footing.