401K Matching

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One of the more overlooked forms of compensation from a company is the amount the company contributes to an employee’s retirement.  Of course, the first version of this was usually a company provided pension.  However, as times changed the instrument that commonly replaced the pension was the 401K, which drew its growth from a combination of employee, sourced funding and potentially employer sourced matching contribution.

The amount the employer matches, and the manner in which they match it can have a significant impact on the employee’s total career compensation amount.  However, this amount of compensation is accrued over years of employment and is not usually usable until retirement age, so it often goes overlooked by prospective employees.  Another frequently overlooked advantage of the 401K is that the income put into the fund is before taxes are withheld, and is tax exempt until retirement, which maximizes fund growth (up to a predetermined maximum IRS limit).  Finally, 401K funds are usually transferable so that as a pilot continues along the normal path of career progression, the fund can usually be transferred from company to company, allowing a pilot to maximize their retirement over their career.

In many cases, if the employer also offers 401K matching, then the employee can take advantage of the company’s additional funding to increase the retirement growth even more.

id-100244921The amount of matching will depend on the company, but should be one of the things considered when choosing an airline.  A difference of even a few percent can make a huge difference to a retirement account over the course of a career.

The amount of money a company will match is usually based on the employee’s contribution up to a certain percent.  For instance, Company A might match up to 6% of the employee’s contribution, while Company B doesn’t match the employee’s contribution at all.  Essentially, as long as the employee at Company A contributes at least 6% of their income to the 401K, the company will match that amount.  If the employee contributes less than the 6% maximum, then the company will match whatever the employee contributes below that amount.  If the employee contributes the full 6% in the case of Company A, then they are effectively getting 12% contribution including the company match.  Compared to Company B, this is double the retirement funding.

The way the company pays the match may also vary.  In some cases, the company will match the employee funding at every paycheck.  In other cases, they may match quarterly.  The way the match is paid, should be stipulated in the contract of the particular company.  There will also be situations where the employee may have to be at the company a certain amount of time in order to keep the employer contribution.  For instance, Company A may require an employee to be on the payroll for a minimum of 1 year in order to keep any employer contributions while Company B may allow the employee to keep the company’s additions without any limitations.  In other cases, the amount of contribution may be graduated so that as the employee puts in more years of service, the company increases the match.

This is a very large form of compensation because it has the potential to affect the value of a retirement fund by up to several hundred thousand dollars or more over the course of a career.  Most fund companies that provide the 401K funds for companies have calculators that will estimate what the different contributions will produce over the years, depending on percentage contribution, expected return and other variables.

Given the large effect of contribution changes to retirement funds, it is important to know what the prospective company’s options for funds and matching contribution are in order to maximize the value of available retirement funds

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