As recently as 2024, about 70 million Americans are actively participating in 401(k) Plans at their place of employment. Percentagewise, recent auto-enrollment plans have increased the participation rate from 54% (for non-auto-enrolled plans) to about 84%. This is an excellent development, and we should always push to bring that figure up toward 100%. Planning to retire solely on Social Security is the worst so-called retirement planning anyone could adopt.

Congress unintentionally created the 401(k) in 1978, when they were addressing an issue with taxation of executive deferred compensation. Two years later, a benefits consultant was reading the language of Section 401(k), and realized that it could be interpreted to allow participants to contribute to their own accounts on a pre-tax basis. IRS agreed, and the rest is history.

For most working Americans, finding dollars that could be deferred to their own futures is difficult, given the many demands on their incomes. Although individual 401(k) contribution limits are generous, only a minority of participants are able to maximize (“max out”) their legal contributions. Others should, to the best of their ability, do what they can to maximize current contributions and take advantage of opportunities built into the Plan.

While there is no lower limit to individual contributions, incentives built into many Plans should be explored and targeted. Maximizing the minimum means taking advantage of Plan provisions that add value above participant contributions. The most common incentive is Company matching funds.

While matching provisions vary by Plan, typically they apply to contributions by individuals (salary deferrals), up to a certain percentage of salary. For example, the Company may match 50% of employee contributions up to 6% of salary. Combinations are numerous and complicated.

Company matching funds provide the first step in maximizing the minimum contribution. Every participant should (at least) contribute the percentage of his or her salary to which matching funds apply. Free money.

Some participants are able to accelerate their own contributions early in the year. This is sound thinking, but requires a word of caution. Many Plans limit matching funds by the month, and if participant contributions are “front-loaded” into the early months, some matching funds may be missed. Spreading contributions throughout the year may assure no loss of matching funds.

Maximizing the Minimum requires understanding the Plan’s provisions and applicable Tax Code limitations. Sadly, many participants believe they are “maxing out,” but fall short. Perhaps the best advice this financial advisor can offer is to start young and be consistent. Time in the market is your best friend.