Many companies offer retirement plans to their employees to help them secure their financial future. These are typically investment-funded plans like a 401k, where the employee contributes a certain percentage of his paycheck into the plan and chooses how to invest the money. Employers provide additional incentives for employees by offering a matched contribution up to a certain percentage of the employee’s salary. These matched employer contributions vary depending on the size of the organization and the industry it serves.
It’s important first to understand two figures used by the employer: the employer’s match and the percentage of salary to match. When employers speak of a matched contribution, they refer to how much of every dollar the employee will put into the plan. If, for example, an employer matches 100 percent, then they will match a dollar for every dollar that an employee contributes into the plan. So if an employee allows a $100 deduction from each paycheck to fund his 401k, the employer will kick in an additional $100 as the match.
The second important figure is percentage of salary. An employer might stipulate that the match takes effect for up to 10 percent of an employee’s salary. If the employee makes $50,000 per year, then the employer can match 10 percent of that, which is $5,000. If the employee maxes out his contributions, then his total contribution for the year will be $10,000, assuming it is a 100 percent match. The employee can certainly contribute more than 10 percent of base pay, but the employer will only match the first 10 percent and no more.
Average Employer Matches
According to a November 2002 CNN Money article, the average employer match is 3.7 percent of an employee’s salary for employees who choose to max out their contributions. Compdata's Benefits USA 2010/2011 survey found employer averages hovering between 3.3 percent and 5.1 percent. The Compdata survery reported that the average for the actual dollar amount of the match was around 65.3 percent -- or 65 cents for every dollar the employee puts in. ERC, a human resources organization, conducted research in 2008 and found companies offering some creative solutions in their matches, such as a 100 percent match on the first three percent and a 50 percent match on the next two percent.
Companies sometimes kick in profit sharing as an added bonus into the retirement plan. This match can vary based on the company’s performance for the year. The company takes a percentage of the employee’s salary and contributes one lump sum into the retirement account at the end of the year. The average profit sharing contribution was around five percent as recorded in the November 2002 CNN survey of over 100 companies.
Industry Affects Contributions
According to Compdata's Benefits USA 2010/2011 survey, an employee's industry affects the level of employer contributions. Industries that pay the least include hospitals, which offer a 3.3 percent match on employees’ pay. Better compensation plans are with utilities and non-profit organizations, which pay at 6.6 and 6.9 percent, respectively. In the middle are service industries that offer a 5.2 percent match on their employees’ salaries.
Nader Ghali holds a B.A. in English literature and has worked as a freelance writer since 2001. He has been published in the Web edition of "Technology and Learning Magazine" and covered business topics for several online publications.