Week 14 Day 2: The 401(k): Your Employer's Gift

Many employers match 50-100% of your 401(k) contributions up to a certain percentage of your salary. If your employer matches 50% up to 6% of salary, and you earn $60,000, contributing 6% ($3,600) gets you $1,800 free. Not taking the match is leaving $1,800/year on the table.

The employer match is the single highest guaranteed return in investing. A 50% match on your contribution is an instant 50% return before any market growth. A 100% match is a 100% return -- your money doubles the moment it hits the account. No investment in history offers this. The order of operations for investing should always be: Step 1: Contribute to 401(k) up to the full employer match. Step 2: Max out a Roth IRA ($7,000/year in 2024, $7,500 if over 50). Step 3: Go back and increase 401(k) contributions toward the max ($23,000/year in 2024, $30,500 if over 50). Step 4: Invest in a taxable brokerage account. This order maximizes free money (match), then tax-free growth (Roth), then tax-deferred growth (401k), then taxable growth.

The 401(k) was created by Section 401(k) of the Internal Revenue Code, added by the Revenue Act of 1978. It was not originally intended as the primary retirement vehicle -- that role was filled by defined-benefit pensions. Ted Benna, a benefits consultant, is credited with designing the first 401(k) plan in 1981 by creatively interpreting the statute. The shift from pensions (guaranteed income for life) to 401(k)s (market-dependent savings) transferred investment risk from employers to employees -- a fundamental change in the social contract of retirement. As of 2024, 401(k) plans hold approximately $7.7 trillion in assets (ICI data). The 2024 contribution limit is $23,000 ($30,500 for those 50+). Employer matches are not counted toward the employee limit but are subject to a combined employer+employee limit of $69,000 ($76,500 for 50+). Vesting schedules (typically 3-6 years for the match) mean you may forfeit employer contributions if you leave before fully vested.