Whether you’re new to your career or well-established, you’ve likely heard the terms employer match and profit-share , but what do they mean? While these retirement plan benefits operate differently, the end goal is to provide the employee with added earning opportunities for their retirement years.
These employer-contribution offerings are typically made alongside standard retirement benefits, such as an employer-sponsored retirement plan, like a 401(k) or IRA. These benefits can be a great way to boost your nest egg and require little to no extra work for the employee.
If you’re not sure if your employer offers these added benefits, speak with your HR team or benefits specialist to find out.
Employer Match
Contributing to your employer-sponsored retirement account can help you secure a stable retirement, but utilizing additional benefits, like employer matching, can be the difference between a secure retirement, and a fruitful one.
To put it simply, employer matching involves money being deposited into your employer-sponsored retirement account – such as a 401(k) – by the employer. The employer matches your contributions up to a certain percentage or dollar amount, helping your retirement account grow at a faster pace.
For example, if your employer offers a matching contribution up to 5%, then you should be contributing at least 5% to capitalize on their match offer. If you only contribute 3%, they will match that lower amount, resulting in fewer dollars added by your employer. If your budget allows, make sure to maximize your contributions to ensure you’re getting the most money possible for retirement thanks to the employer matching contributions.
As the employee, make sure you understand the terms of the employer match program, as many companies have rules and regulations tied to it. For example, you may not be fully vested in your employer match balance until you reach a certain number of years with the company, or your match dollars may vest on a tiered scale, such as 1% after one year of service, 2% after two years, etc. Check with your company’s HR team or benefits specialist to learn more about your company-specific offerings, employer contribution, and employee contribution. Knowledge is power, so definitely tap into your company’s HR team!
To learn more about the benefits of an employer match for both the employer and the employee, read our helpful Slavic401k blog post, Are You Turning Down Free Money? Everything You Need to Know About Employer Match 401(k) Programs.
Profit-Share
Another great retirement benefit is profit-sharing, also known as a deferred profit-sharing plan (DPSP). This retirement plan benefit is structured so that employees receive a percentage of their company’s profits, and profit sharing may be offered in addition to a 401(k) plan.
Shared profits can be structured in a few different ways, such as salary-based compensation, meaning that higher earners have more stake in the company and vice versa. Another method is that the company decides how much profit to allocate to each employee, and the percentage can change from year to year.
The most common profit sharing strategy, however, is the comp-to-comp plan, which calculates shares based on the employee’s salary. Investopedia presents this example:
Employee A earns $50,000 per year, and Employee B earns $100,000. If the business shares 10% of the profits, and the business earns $100,000 in a fiscal year, the company would give Employee A $3,333.33 and Employee B $6,666,67.
If your company offers a profit-sharing plan as an employee benefit, it’s a great bonus and can help you to make more money for retirement. Make sure you talk to your company’s HR department or benefits specialist to understand the terms of your profit-sharing plan. Just like with a 401(k) match plan, a profit-share plan comes with rules and regulations. It’s important to understand the terms of your profit sharing plan so you know when the “free” contributions truly become yours, or if you need to dedicate more time at the company before you can profit from your company’s generosity.
Regardless of your company’s retirement plan – employer match or profit-sharing – any extra savings can help you to build a solid nest egg and to plan for a more stable retirement.
Like what you’ve just read? Make sure to sign-up for our free Slavic401k blog below – we’ll notify you when fresh, informative financial content is posted on our site so you never miss-out. Slavic401k is dedicated to assisting plan participants – allow us to be of assistance to you as you plan for a healthy retirement.
