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Your 401(k) match is billed as “free money,” but high-income workers may be getting an unfair share
The 401(k) is now the most popular type of retirement plan, with many employers providing a company match when workers sock away money in their accounts. But these matches — often shorthanded as “free money” from your company— may exacerbate inequality in retirement, new research finds.
About 44% of employer matches are directed toward the top 20% of earners, according to a May study from researchers at Vanguard, Yale University and the Massachusetts Institute of Technology. By contrast, the bottom 20% of workers receive just 6% of their employers’ matching contributions, the analysis found.
There’s a lot of money on the line, as corporations provided about $212 billion in matching contributions in 2021, or almost 60 cents for every dollar saved by workers, the study noted. But the bulk of those employer dollars are more likely to go to higher-income workers, even though businesses typically dangle their 401(k) matches as a way to convince all workers, regardless of income, to save for retirement.
“Employer contributions are a ripe target for innovation,” the authors wrote in the report. “They disproportionately accrue to those with higher incomes, White workers, those with more access to liquid wealth and those with richer parents.”
The findings come amid increasing scrutiny of the pitfalls of 401(k)s, which now serve as the predominant retirement vehicle for American workers. About half of all private employees participate in a so-called defined contribution plan, which include 401(k)s and 403(b)s, compared with about 15% who have access to traditional pensions.
But even as they’ve supplanted traditional pensions, 401(k)s have left behind the bulk of America’s workers, according to Teresa Ghilarducci, a labor economist and a professor at The New School for Social Research in New York. First, many workers lack access to them, and secondly, those who participate in 401(k)s are largely on their own to figure out how to invest and manage them, creating what Ghilarducci calls a “flimsy” do-it-yourself system.
After more than four decades of a 401(k) system, almost 3 in 10 older workers are nearing retirement without a penny saved. Two-thirds of younger baby boomers don’t have enough saved for their golden years.
Who saves — and why
To be sure, it’s not entirely surprising that higher-income workers get a larger share of a company’s matching contributions. For instance, take two workers who direct 10% of their pay into their 401(k)s, with the first earning $100,000 and the second earning $50,000.
With a typical percentage match, where an employer matches 50% of an employee’s contributions up to 6% of their pay, the worker earning $100,000 would get a $3,000 match; for the employee earning $50,000, the match would be $1,500.
But the analysis found that higher-income workers are actually getting a bigger share of employer contributions than their share of income — indicating that top-earning employees are enjoying outsized benefits when compared with lower-earning coworkers.
In fact, the top 20% of earners get an 11% bigger share of employer contributions than income, while those in the bottom 20% get a 29% smaller share of matching dollars than income, the study found.
That’s partly because some wealthier workers are more likely to max out their savings, which helps them get the most in “free money” from their employers. But these people are also likely to have other advantages, like family wealth or a college degree, the study noted.
At the same time, the analysis found that there’s not a lot of evidence that company matches actually convince workers to save more. A majority of low-income workers don’t participate in their 401(k) plans despite their company match, while most high-income workers are saving above the company’s match cap, even though they may not benefit from any additional “free money,” the study found.
In other words, 401(k)s are giving more of a leg up to wealthier people who can afford to save more and max out their company match, while putting people who can’t afford to save as much at a disadvantage, a previous analysis from the MIT researchers found. The end result is that wealth inequality is likely to persist, they concluded.
There is one type of 401(k) match that offers a fairer distribution of company dollars, the recent analysis found. This type of program is called a dollar cap match, which is only used in 4% of 401(k) plans. These programs cap employer contributions at a dollar amount, such as tapping out a match at $6,000 a year, regardless of how much an employee earns or contributes.
And employers could add other attributes to help lower-income workers, such as immediate vesting, auto-enrollment and a higher default savings rate, the researchers noted.
The following is a transcript of an interview with Sen. Mark Kelly, Democrat of Arizona, on “Face the Nation with Margaret Brennan” that aired on Oct. 6, 2024.
MARGARET BRENNAN: Joining us now is Arizona’s Democratic Senator, Mark Kelly. He’s in Detroit this morning on the campaign trail for the Harris campaign. Good morning to you, Senator.
SEN. MARK KELLY: Good morning, Margaret.
MARGARET BRENNAN: I want to talk to you about Arizona, but let’s start in Michigan, which is where you are right now. And it is going to be such a key state to a potential Harris or Trump victory. Vice President Harris is facing challenges among black men, working class people, as well as the Muslim and Arab populations skeptical of the White House support for Israel’s wars. What are you hearing on the ground there from voters?
SEN. KELLY: Well, my wife, Gabby Giffords, and I have been out here for a couple days. We’ve been campaigning across the country, Michigan, I’ve been in North Carolina, Georgia as well. I’ll be back to Arizona here soon. The vice president was out here speaking to Muslim organizations and the Arab community about what is at stake in this election and addressing the concerns that they have. What we’re hearing, issues about the economy, about gun violence, about, you know, supporting American families and the difference between Donald Trump and Kamala Harris. You know, Kamala Harris, who has a vision for the future of this country, Donald Trump, who just wants to drag us backwards.
MARGARET BRENNAN: Today in Dearborn, Michigan, there’s a funeral service for an American man who was killed in Lebanon by an Israeli airstrike. It just underscores how that community you’re talking about out in Michigan feel some of what’s happening in a personal way to their community. Given how close this race is, do you think this war and the expectation it could escalate could cost Democrats both a seat in the Senate and potentially the presidency?
SEN. KELLY: Margaret, nobody wants to see escalation and it’s tragic when any innocent person, whether it’s an American or Palestinian, lose their life in a conflict. Tomorrow’s one year since October 7th, when Israel was violently attacked. Israel has a right to defend itself, not only from Hamas, but from Hezbollah and from the Iranians. But, you know, I and my wife, you know, we feel for the community here who’s been affected by this. And that’s why the vice president was out here earlier, a few days ago, meeting with that community.
MARGARET BRENNAN: But it’s a live issue.
SEN. KELLY: Yeah, sure. I mean, there is an ongoing conflict in the Middle East. Israel is, you know, fighting a war now on, I think it’s fair to say, two fronts and then being attacked by the Iranians as well. And, they- they need to defend themselves, and we need to support our Israeli ally. At the same time, when women and children lose their life, innocent people in a conflict, it is- it is tragic.
MARGARET BRENNAN: You do sit on the Senate Intelligence Committee and so I know you know how intense the efforts are by foreign actors to try to manipulate voters going into November. Just this Friday, Matthew Olsen, the lead on election threats at the Department of Justice, told CBS the Russians are, quote, highlighting immigration as a wedge issue. That is such a key issue in Arizona. Are you seeing targeted information operations really focusing in on Arizonans right now?
SEN. KELLY: Not only in Arizona, in other battleground states. It’s the Russians, the Chinese, the Iranians, and it’s significant. And we need to do a better job getting the message out to the American people that there is a huge amount of misinformation. If you’re looking at stuff on Twitter, on TikTok, on Facebook, on Instagram, and it’s political in nature, and you may- might think that that person responding to that political article or who made that meme up is an American. It could be- it could look like a U.S. service member. There is a very reasonable chance I would put it in the 20 to 30% range, that the content you are seeing, the comments you are seeing, are coming from one of those three countries: Russia, Iran, China. We had a hearing recently, with the FBI director, the DNI, and the head of the National Security Agency. And we talked about this. And we talked about getting the word out. And it’s up to us, so thank you for asking me the question, because it’s up to us, the people who serve in Congress and the White House to get the information out there, that there is a tremendous amount of misinformation in this election, and it’s not going to stop on November 5th.
MARGARET BRENNAN: Understood. And we will do our best to help parse that for viewers. But on the topic of the border, President Biden did announce just this past week new regulations to keep in place that partial asylum ban that he rolled out back in June. That’s what’s credited with helping to bring down some of the border crossing numbers in recent weeks. It was supposed to be a temporary policy, dependent on how many people were crossing at a time. Do you think this is the right long term policy, or is this just a gimmick to bring down numbers ahead of the election?
SEN. KELLY: Well, the right long term policy is to do this through legislation. And we were a day or two away from doing that, passing strong border security legislation supported by the vice president, negotiated by the vice president, and the president and his Department of Homeland Security, with Democrats and Republicans–
MARGARET BRENNAN: But this is not legislation.
SEN. KELLY: –This is bipartisan. This isn’t. But the legislation was killed by Donald Trump. We were really close to getting it passed. That’s the correct way to do this. When you can’t do that, Margaret, when a former president interrupts the legislative process the way he did, which is the most hypocritical thing I’ve ever seen in my three and a half years in the Senate. After that happened, the only other option is executive actions. And this has gone from what was chaos and a crisis at our southern border to somewhat manageable. And if you’re the border- Border Patrol, you know, this is this- you need this. I mean, otherwise it is unsafe for Border Patrol agents, for CBP officers, for migrants, for communities in southern Arizona. So it’s unfortunate that this was the- these were the steps that had to be taken.
MARGARET BRENNAN: Okay.
SEN. KELLY: But that’s because the former president didn’t allow us to do this through legislation.
MARGARET BRENNAN: Senator, we have to leave it right there. Face the Nation will be right back.
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Sen. Mark Kelly says Americans need to know about “huge amount of misinformation” on election
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