AMJ Financial Blog

The Importance of Maxing out Contributions to Employer Sponsored Plan Accounts

According to the Employee Benefit Research Institute, only about 4 in 10 workers contributed to an employment-based retirement plan in 2011. This means that the other 60 percent of workers could be missing out on one of the most valuable retirement tools available to them.

There are some significant benefits associated with contributing to such a plan. And these benefits could easily add tens of thousands of dollars or more in value to such an account over the course of a career.

Matching contributions

The first major benefit that probably comes to mind when discussing employer sponsored retirement plans is a matching employer contribution. While not every plan comes with such a benefit, many do. And such employer matches could range from 5 percent all the way up to a dollar-per-dollar addition to your retirement funds. According to 401kHelpCenter.com, in 2012, “Companies contributed an average of 4.1% of participants’ pay to the plan.”

These contributions can act not only as great incentives to put more money into such plans, but they could also be viewed as protection against potential losses. When an employer is putting up their own money, it can act as a sort of buffer. Say your employer provides a match of 50 cents for every dollar you contribute to your plan. Well, even if the stock market has a tremendous year as it did during the financial crisis and loses 20 or 30 percent of its value, that matching contribution by your employer could make up for a substantial portion of those losses without touching a dime of your own contributions.

Lower tax liability

Contributing to an employer sponsored plan account can also help reduce your tax liability. Contributions to such plans can be pre-tax, which can reduce the amount of taxable income you must report annually. By putting several thousand dollars into an employer-sponsored plan – and adding to that an employer match – you could find yourself saving hundreds of dollars or more that might have been spent paying taxes in the near term otherwise.

Dividend reinvestment results

Selecting stocks or funds with healthy dividends can help build account value over time and supplement your employer’s – as well as your own – contributions. Harnessing the power of dividends and reinvesting them into your account over time can also better dollar cost average your contributions. Buying shares at low, middle, and high prices over time can help balance your overall share price average, helping to smooth the hills and valleys of stock market swings.

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