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 benefits operate differently, the end goal is to provide the employee with added earning opportunities for retirement.
These 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.
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. They match your contributions up to a certain percentage or dollar amount, helping your account grow at a faster pace.
For example, if your employer offers matching 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.
As the employee, make sure you understand the terms of the match program, as many companies have rules and regulations tied to it. For example, you may not be fully vested in your 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.
To learn more about the benefits of an employer match to both the employer and the employee, view the Slavic401k blog, 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 plan is structured so that employees receive a percentage of their company’s profits, and it may be offered in addition to a 401(k) plan.
The profits they earn 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 way is that the company decides how much to allocate each employee, and can change the percentage from year to year.
The most common way, however, is the comp-to-comp plan, which calculates shares based on the employee’s salary. Investopedia states 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, it’s a great bonus and can help you make more money for retirement. Make sure you talk to your company’s HR department or benefits specialist to understand the terms of your 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 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.
Regardless of your company’s plan, any extra savings can help you build a solid nest egg and plan for a more stable retirement.
