Taking Advantage of Employer Matching

Economists are fond of saying that “there’s no such thing as a free lunch”. In this lesson, we’ll get as close as we can to chomping down on that free lunch. The term “employer matching” sounds unwieldy and rather boring, but the bottom line is: if you aren’t taking advantage of your employer matching program, you are missing out on free money. It’s as simple as that.

What is Employer Matching?

An employer matching program is a benefit that companies offer to their employees. Typically, it involves the employee (you) contributing a portion of their paycheck to some kind of retirement savings or profit sharing program, and the employer then matching part or all of what the employee puts in.

As an example: my employer offers a “share ownership program”, where I can contribute some of my paycheck towards buying shares in my company. My employer will then match 33 cents of each dollar that I put in, up to a total benefit equal to 2% of my gross salary.

If my gross salary is $50,000 per year, my employer will provide me with a maximum benefit of $1,000 per year (2% of my gross salary). To get this full benefit, I need to:

• Contribute 6% of my paychecks towards this share program — $3,000 per year
• For every dollar that I put in, my employer will then “match” 33 cents. This means that my employer matches $1,000 per year
• In total, I’ll have invested $4,000 in my company’s shares each year

In this case, my employer has given me “extra” pay of $1,000 (as long as I contribute the maximum needed). This is free money — I’ve invested $3,000 and have been given back $4,000. This is a guaranteed and instant return of 33% on my invested money. You simply won’t find a better investment opportunity than that.

How Do I Sign Up For Employer Matching?

Most employees will need to take some action to get enrolled in their employer’s matching program. This means that unless you are signed up, you are missing out on free money.

If you aren’t sure if your company has a matching program, try reading through your company’s internal website. Specifically, the “HR” or “benefits” section. The general umbrella term to look for is “employer matching”, and the specific types of programs that may be offered are “defined contribution pension plan”, “share ownership program”, “company RRSP” (in Canada), or “401(k)” (in the US).

To get more info on the specific details and how to sign up, get in touch with your company’s HR department. Ask them about employer matching and they should be able to answer your questions and guide you through the sign-up process.

As part of signing up, you may be asked to choose your investment options (e.g., stocks, fixed income, money market cash fund, etc.). If so, you may encounter a whole bunch of jargon and complicated terms. We’ll discuss how all of this works in the investing chapter of this course. Stay tuned.

Once you sign up for the program, your take-home pay on your paychecks will decrease (as discussed in the previous lesson, this will now be a “deduction” item on your paycheck).

Don’t panic — this is because the portion that you are contributing is taken directly off from your paycheck. This money (and the employer contributed portion) does not arrive directly in your bank account, but is being held in a new account on your behalf. The money is still yours, it just isn’t being stored in your main bank account.

This may seem like a chore, but it’s the easiest few hundred or few thousand bucks you’ll ever make!

How Much Should I Contribute?

The short answer is that you should contribute just enough to the matching program to receive the maximum benefit that your company offers, and not a dollar more.

For my share ownership program, I am allowed to contribute up to a maximum of 12% of my paycheck towards buying shares in my company. However, my company’s matching contribution will never exceed 2% based on the rules of the program. Therefore, my contributions up to 6% are matched one-third by my employer, but any contributions beyond 6% of my paycheck are no longer matched.

In this case, contributing more than 6% of my paycheck doesn’t make sense. Instead of buying more shares in my employer, it’s better for me to save that money in other ways.

In fact, it’s smarter to diversify my investments away from my employer. Investing all of your savings in company stock can end badly. Employees of Enron, Nortel, and numerous dot-com failures can attest those risks.

A Note on Debt

Almost everyone who can take advantage of employer matching should do so. The main exception to this rule is for people who have high interest rate debt.

If you have debt at a very high interest rate, you may want to direct your cash towards paying down that debt instead of contributing towards an employer matching program.

Take note that the return you get on employer matching is often very high (typically 25% or higher, even up to 100%). If the interest rate on your debt is lower than the return you’d get through employer matching, it is mathematically more optimal to put your money towards employer matching (for example, it’s better to earn a return of 50% on your money instead of paying down debt at a 10% interest rate).

If the return you get on employer matching is lower than the interest rate on your debt, you should pay off those debts first before anything else.

No matter what, you should always make the minimum payments required on your debt. Don’t pass go; don’t collect $200; don’t put your money in an employer matching program until you pay the minimum payments on your debt.

With your leftover cash, I would recommend putting that money in an employer matching program if the return you get on your money is at least two times higher than the interest rate on your debt. There is no fancy math or magic behind this decision — it’s up to your own preference and risk appetite for carrying debt.

Your Assignment

• Find out if your company offers employer matching. Consult your internal company website or ask HR
• Get familiar with the details of the program. How much can you invest in the program? How much will your company match? What percentage return is being offered (e.g., if for every dollar you put in your company gives you back 25 cents, this is a return of 25%)
• Sign up for your employer matching program and make sure that you are getting the maximum benefit possible
  • As discussed above, those with high interest rate debt may want to pay off those debts first before putting their money in an employer matching program