What are the Typical Offerings and How Does Your 401k Compare?
If you are employed at any reasonably sized company, odds are you have access to or have even been automatically enrolled in its 401k plan. A 401k is a form of retirement savings that has largely supplanted the traditional pension as the major source of retirement income for employees. Contributions are added pre-tax which means that you will not pay income taxes on the portion of the income that you contribute to your 401k each year. The idea is that you will pay those taxes on your disbursements during retirement when you are typically in a lower tax bracket and have a much simpler tax situation in general. So, how does your company’s 401k compare?
First, let’s look at the basic ingredients of a 401k:
- The percentage or dollar amount of your contributions that your company will match with its own money
- How the company matches (dollar-for-dollar, 25-125% depending on company performance, etc)
- The percentage or dollar amount that they will contribute in addition to any contributions or matches
- The years required to vest
- What types of investments are offered in the account (stocks, bonds, etc)
There may be some other exotic offerings found at some companies, but generally it boils down to these main ingredients. Once you start looking into the math behind matches, additional contributions, etc it will quickly become apparent that what your company chooses to offer can dramatically affect your total savings in retirement, all things considered.
For instance, with a $50,000 income with 5% annual increases over 40 years and 8% returns/year (standard ideal scenario, actual returns vary). You are contributing 5% of your income.
Company A: 5% match, 15% contribution – Value = $5,454,245.13
Company B: 2% match, 0% contribution – Value = $1,908,985.79
Wow, just look at the difference!! Where would you want to work? And the crazy part is that company B is a globally known, well-respected business that has handsomely rewarded its stock holders over the last year. Read on to find out who these companies are!
What is the Average Offering for Major US Companies?
If we look at a list of the Top 240 companies in the S&P 500 we will see a huge mix of different matches, contributions, and options We will see that the averages are:
- Potential match: 4.56%
- Additional contribution: 1.32%
- Years to vest: 1.66 years
These average don’t look too hot at first glance, but remember that these numbers are the average of the top 240 companies in the S&P 500 and that there is a LOT of variation as we will see in the best/worst list. How does your company compare to these averages? In my case I’m sitting on a pretty average 401k with a 6% match of 25-125% of contributions depending on company performance, 1.5% additional contribution, and a 5 year vesting period. My vesting period was definitely on the highest end of this sample, but since I’ve already been with the company that long it doesn’t factor in that much for me.
Just remember that depending on how your company structures their plan you could have dramatically different values at retirement as well as potentially more or less money coming to your on your paychecks. The ideal scenario is one in which you contribute a relatively low amount which is then matched 100% and then an additional contribution is made without you having to pay anything. Win-win!
Which Companies Are the Best?
So, you may have wondered if the companies in our little example above were, in fact, real companies (Company A is Philip Morris International). They are! Here are the top 4 overall ranked companies for best 401k: