Vanguard recently released its “How America Saves 2025” report, which offers insight into the approximately 1,400 defined contribution plans it manages, as well as the savings habits of the 4.8 million participants in those plans.
The good news is a lot of people are making use of employers’ defined contribution plans, typically a 401(k). But there’s one key benefit in your 401(k) you should know about and take advantage of as it amounts “free” money.
The basics of a 401(k) plan
Essentially, a 401(k) plan is a tax-deferred retirement account offered by your employer. It is similar in nature to a traditional IRA. You put income in without paying taxes on that money, which lowers your tax bill today. That money can grow without tax consequences until you withdraw it. At that point, the cash coming out of the account is taxed as regular income.
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There are various rules to be aware of, but that’s the big picture. It is a great idea to take advantage of your company’s 401(k) if it offers one. Most employees do but not all. In 2024, the year Vanguard’s report covers, roughly 82% of those with access to a defined contribution plan made use of it.
That said, there’s a wrinkle in the participation rate that’s important. Plans that required the employee to enroll themselves only saw a participation rate of 64%. Plans with automatic enrollment, on the other hand, saw a participation rate of 94%.
To be fair, the automatic enrollment feature is relatively new, so if you have been with your company for a long time, you may not have benefited from this feature. Either way, if your company has a 401(k) plan and you aren’t enrolled, you should do so as soon as possible.
How much should you save?
But enrolling is just one of the key decisions you have to make. The next one is how much you should save, which is known as your contribution rate. For those just getting started, even 1% is better than nothing. Sure, 1% of your salary may seem small, but it is hard to overstate the importance of developing a consistent saving habit. The sooner you start, the better. Even if you are tight on money, try to set aside at least 1%.
On the opposite end of the spectrum, some workers are dedicated enough to contribute up to the allowable limit. In 2024, a person under the age of 50 could save up to $23,000. Thanks to a catch-up provision, the maximum increased to $30,500 for those 50 and older. If you can afford to max out your 401(k) contributions, you are likely in great shape. Just 14% of participants maxed out their plans in 2024 (about 16% of those eligible took advantage of the catch-up provision).
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However, most people fall somewhere between 1% and the maximum savings level. In 2024, Vanguard’s data shows plan participants had a median contribution rate of 6.8%. Though that number should ideally be higher, it is usually enough to take advantage of an important benefit many plans offer: the employer match, which has a median value of 4%, according to the report.
While it is important to just start saving, if you can at least save enough to max out your employer’s match, you will be way (WAY!) ahead of the game. With a dollar-for-dollar match, for example, contributing 4% of your salary would mean your employer also contributes an additional 4% on your behalf, doubling the amount of money you save. This is essentially free money going to your retirement account, and it amounts to a guaranteed return on your contributions before you even start investing them.
Don’t miss out on the “free” stuff
Saving in a 401(k) plan means deferring spending today in to boost your retirement income in the future. That’s hard to do emotionally and financially. But once you get started on the saving journey, it gets easier.
Based on the report, 86% of defined contribution plans feature employer matching contributions. While this Vanguard-specific data may not be representative of all employers across the country, this benefit has become common enough that anyone saving through a 401(k) should find what their own company offers and take advantage of the match when available.
A matching contribution will not only materially increase your savings but give you an immediate financial reward to bolster your savings habit over the long term. So if your plan offers it, your first savings goal should be to max out the match.