401k
A 401k is a workplace retirement plan funded by payroll deductions, often with an employer match on what you contribute. The match is compensation available nowhere else, and the plan's fund menu — which you did not choose — decides how much of the balance survives thirty years of fees.
Two things make a workplace plan different from every other account: someone else may put money in alongside you, and someone else chose the list of things you are allowed to buy. Both are worth handling deliberately, and most people handle neither.
How it works
Contributions come out of pay before it reaches you. In the traditional version they reduce your taxable income for the year and are taxed on withdrawal; in the Roth version they are taxed now and qualified withdrawals are not.
Many employers match some fraction of what you contribute, up to a cap expressed as a share of salary. That match has no equivalent in any other account and it is the single strongest reason to prioritize the plan.
You choose from a menu your employer’s plan provider assembled. It might contain a very cheap index fund and it might not, and the difference over decades is large.
How much you can put in
For 2026 the IRS limit on your own contributions is $24,500. From age 50 you can add an $8,000 catch-up, and at ages 60 to 63 the catch-up is $11,250 instead. From 2026, if last year’s wages from this employer were over $150,000, the IRS requires any catch-up to go in as Roth (after-tax) money, in plans that offer a Roth option. The employer’s match does not count against your $24,500. These figures change most years, so check the current year’s limit with your plan or on irs.gov before setting a rate close to it.
Most people are nowhere near the limit, which is why the match cap, not the legal maximum, is the number that decides the right contribution rate for a first job.
A worked example
Take a $75,000 salary where the employer adds 50% of what you put in, up to 6% of salary.
Contributing 3% puts in 2,250 and draws 1,125 from the employer.
Contributing 6% puts in 4,500 and draws 2,250.
So at 3% you are leaving $1,125 a year uncollected. Raising the rate costs you 2,250 more and brings in 1,125 more that was already offered. The workings are in the 401k match calculator.
“50% up to 6%” does not mean the employer stops at 6% of your contribution. It means the first 6% of your salary is eligible, and reading it the other way produces a contribution rate far below what captures the offer.
The menu is the part to audit
Fund fees are quoted in basis points: one basis point is one hundredth of a percent, so 75 basis points is 0.75% a year. On this site’s arithmetic, an annual fee of 5 basis points removes 1.5% of a thirty-year pot, 20 removes 5.8%, 75 removes 20.2% and 150 removes 36.5%.**
A target-date fund holds a mix of stocks and bonds that shifts toward bonds as its named retirement year approaches, and it is often a sensible default when its fee is low. A plan whose default is a 90-basis-point target-date fund is charging roughly a quarter of the result against a 4-basis-point index option sitting three rows below it on the same menu.
Plan administration fees sit on top of the fund fee and are disclosed in the plan documents rather than on the fund page. They are worth finding once.
Auto-enrolment and its default
Many plans enroll you automatically at a low rate, commonly around 3%. It is set to be unobjectionable rather than to be correct, and it frequently sits below the match cap.
Which means the plan’s own default can be the thing leaving employer money uncollected. Checking the rate against the cap takes a minute and is worth more than most investment decisions available in the menu.
Vesting and leaving
Your own contributions are always yours. The employer’s part may vest on a schedule — all at once at a date, or in steps — and leaving before it completes forfeits the unvested portion.
When you leave, the balance can usually stay, move to a new employer’s plan, or roll into an IRA you open yourself. The last option typically widens the menu enormously, which is often the single best moment to fix an expensive fund choice.
Costs beyond the fee
Moving between the menu’s funds is still a transaction. Most 401k funds are mutual funds bought and sold once a day at their closing price, so there is usually no bid-ask spread, but a plan that offers exchange-traded funds or charges trading or redemption fees does make each switch cost something. Neither is a reason to react to quarterly performance.
Some plans match per pay period rather than annually, so front-loading contributions into the first half of the year can miss later matches entirely unless the plan has a true-up provision.
The original data
Of the 24,971 unique videos collected for this site’s search study, 22 have a title about workplace retirement plans, at a median of 81,626 views across 20 channels — and 36% of those titles are instruction-shaped. Roth accounts appear in 24 at 95,293.
Twenty-two videos on the account and fifteen on the match inside it. The match is nearly a subject of its own by search volume, which is a fair reflection of it being the only part of the arrangement where someone else is contractually on the other side.
The question: Money is tight this year. Skip it and catch up later?
The answer is that the match cannot be caught up. Contribution limits are annual and the match is calculated on what you put in during that year, so a skipped year is an offer that expired rather than one that carries forward. Catching up later replaces your own money and never replaces theirs.
When it fails
The plan’s own defaults are where most of the damage is done, and none of it looks like a mistake.
Auto-enrolment at a rate below the match cap, invested in the most expensive fund on the menu, produces an account that grows every year and still ends up substantially smaller than it should have been. Nothing goes wrong, no statement flags anything, and the two decisions that would have fixed it — raise the rate to the cap, move to the cheapest broad fund — are both available on the same afternoon.
The second failure is misreading the match formula. The cap is a share of salary.
A third is ignoring vesting when changing jobs. An unvested match goes back.
A fourth is leaving old plans scattered. Each keeps its own menu and its own fees.
A fifth is treating the fund menu as fixed. It is chosen by the employer and can be questioned.
And a sixth is cashing out on leaving. That converts a sheltered balance into a taxable event and usually a penalty.
Related
Roth IRA is the individual account with more menu freedom. Index funds is usually the cheapest thing on any plan’s menu. And expense ratio is the number to audit the menu against.
For anyone choosing between a US workplace plan and a UK wrapper, the two are compared line by line in 401(k) vs stocks and shares ISA.
The audit worth doing once is the fund menu, not the contribution rate. Everyone eventually raises the percentage; almost nobody opens the plan document to find the cheapest index option in it, and once you are contributing enough to collect the full match, that single afternoon can be worth more than several years of increased contributions.
— Michael Whitman
This page is educational, not financial advice. Test every idea on your own charts before risking money.