TL;DR

Companies use tiered 401(k) matching, like 100% up to 5% then 50% for the next 5%, to encourage higher contributions while also meeting regulatory requirements and potentially saving on their own contributions.

Story

“Ever wondered why your company offers a weird 401(k) matching scheme, like 100% up to 5%, then 50% for the next 5%? It sounds generous, but let’s put on our skeptical financial hats and look closer. Imagine a company matching 100% up to 7.5% of your contributions. Simpler, right? But from the company’s view, they’d rather you save more (and maybe they save a bit too). This is where that 50% match comes in. It’s like a carrot dangling in front of you, encouraging you to put in the extra 2.5% to get the full 7.5% match. Now, companies will tell you this encourages saving, but it also helps them pass what’s called ’non-discrimination testing.’ It’s a rule to prevent plans from overly favoring top earners. By nudging everyone, especially lower earners, to save more, the top earners can enjoy their full benefits too. But from a skeptic’s perspective, this tiered matching system benefits the company too. It lets them contribute less overall. Think of it this way: if you put in less than 10%, they match less than 7.5%. So, the whole ‘we want to help you save’ narrative gets a little murky. Always remember, these systems are designed within specific rules and motivations. It’s smart to approach them with a healthy dose of skepticism.”

Advice

Don’t just blindly chase the 401(k) match. Evaluate your overall financial goals and ensure the plan aligns with your needs.

Source

https://www.reddit.com/r/personalfinance/comments/1i56rwp/why_do_some_companies_have_a_50_match_on/