Retirement Options

How To Make the Most of Your Employer Retirement Options

About 67% of workers in the United States have access to workplace retirement plans. The majority of workers in the US, 52%, have defined contribution plans (such as a 401(k). The remaining 15% have both defined benefit (pension) plans and defined contribution plans (12%) or only have access to defined benefit plans (3%). Unfortunately many employees aren’t making the most of their retirement options at work, with 25% missing out on the full employer match and 17% choosing not to participate in their work plan at all.

How to maximize your 401(k)

Contributing what you need to to get your full employer match is almost always worth doing. Employer matches are typically dollar-for-dollar or $0.50 on the dollar, which means your contributions are earning a guaranteed 50% to 100% rate of return immediately when you contribute. All 401(k) plans are different, and it’s important to understand the nuts and bolts of your plan to make the most of your contributions. Depending on your plan, you may only get the employer match and then look elsewhere - or it may hold the vast majority of your retirement savings.

401(k) investment options

Large 401(k) plans only offer about 15 different investment options to their participants, and that number has been steadily declining over time. Fewer options is not necessarily a bad thing if the options are low-cost and appropriate for the participant, but many employees do not have good options. Asset-weighted expense ratios for 401(k) plans are around 0.36%, but average expenses for smaller plans are around 1.60%. If you have poor and/or expensive investment options in your 401(k) plan, it may make more sense to contribute to other retirement vehicles, like IRAs and HSAs, before your employer account. If you have a great plan with plenty of low-cost options, you may consider your 401(k) close to or on-par with other retirement options.

401(k) vesting schedules

Any money you contribute to your 401(k) plan is always yours to keep, no matter how long you stay at your employer. However, contributions from your employer may have a vesting schedule. Some employer contributions are 100% vested immediately, which means all employer contributions will be yours to keep no matter when you leave the plan. Other employers may offer plans with cliff vesting or graded vesting. In a plan with cliff vesting, all employer contributions are 100% vested after a certain period of time. The maximum amount of time allowed for cliff vesting under the Internal Revenue Code is three years, but employers can be more generous if they so choose. 

Under a graded vesting plan, employer contributions vest in percentages at fixed intervals, typically 20% each year of service after plan eligibility. The maximum amount of time for graded vesting is six years, which means employees must be 100% vested in employer contributions after six years of service. Employers can be more generous if they would like. The table below shows the maximum grading schedule allowed under the law.

401(k) contribution limits

401(k) contribution limits are much higher than limits on other retirement options such as IRAs and HSAs. The 401(k) employee contribution limit in 2024 is $23,000, with an additional $7,500 allowed for those age 50 and older for a total of $30,500. If your employer offers after-tax contributions, you may be able to contribute even more money to your plan using what is commonly referred to as the mega backdoor Roth strategy.

What if I have an ESOP or ESPP instead of a 401(k)?

Not all employers offer 401(k) plans or defined contribution plans such as 403(b)s or 457s. Employee stock ownership plans (ESOPs) and employee stock purchase plans (ESPPs) give employees access to ownership in the company they work for. ESOPs grant employees shares in the company without requiring the employee to purchase company stock. ESOPs work like 401(k)s, but with employer stock instead of other investments. They often have vesting schedules before employers own all of their shares free and clear, and taxes work similarly to other pre-tax retirement accounts (contributions are often tax-deferred and distributions are taxed).

Employee stock purchase plans (ESPPs) allow employees to purchase company stock at a discount. The discount may not seem like much, but even a 15% discount, which is typical, can be a tremendous benefit in the long run, particularly if the stock performs well. One of the dangers of employee stock plans is they can comprise a large portion of an employee’s net worth. Divesting from these plans, when possible, is important to maintaining a diversified portfolio and not allowing your net worth to become highly concentrated in one stock or one company. 

Wondering what unique benefits or constraints your employer’s plan offers? Below are details of retirement plans offered by some of the biggest employers in Minnesota, headquarters of Aberdour Investments. If you’d like to chat more about the details of your employer plan and how to maximize your benefits, feel free to connect with me.

Mayo Clinic Retirement Benefits

If you work for a nonprofit organization like the Mayo Clinic, you may have access to a 403(b) plan instead of a 401(k). 403(b) plans are nearly identical to 401(k) plans, with the same contribution limits and similar investment options, but are only available to nonprofits and government employees. The Mayo Clinic employer match is based on service time with the company, which means those with under 20 years of service receive less match than those who have served for 20-29 years and 30 or more years. Employees may also be eligible for a pension, which can be taken as a lump sum or annuitized. Benefits for large organizations change frequently, so make sure to contact your HR department for the most up-to-date information about your benefits.

Medtronic Retirement Benefits

Medtronic offers employees a 401(k) with matching contributions (up to 50% of the first 6% employees contribute, for a total match of 3%) and an employee stock purchase plan (ESPP). The ESPP offers employees a 15% discount on company stock, and they can contribute 2-10% of eligible earnings into the plan. 

University of Minnesota Retirement Benefits

The University of Minnesota offers 401(a) plans to their employees, which are similar to 403(b) plans in that they are reserved for nonprofits and government employees, but 401(a) plans have some big differences. Employers can mandate 401(a) contributions and usually decide whether contributions are pre-tax or post-tax. They generally have fewer investment options than 401(k) plans. The University of Minnesota plan requires faculty and professional and administrative employees to contribute 5.5% of their covered salary, with the university contributing 10%.

Civil service and labor-represented staff at the university are instead enrolled in a pension plan. They contribute 6% of covered salary, temporarily reduced to 5.5% from July of 2023 through June of 2025, and the university contributes 6.25%. The vesting period is three years.

Optional retirement plans are offered to all employees and are more similar to 401(k) plans. The university offers both an optional retirement plan through Fidelity and a 457 deferred compensation plan. If you are looking to save even more money for retirement through the university, these plans are wonderful options to do so.

US Bank Retirement Benefits

US Bank offers employees a 401(k) plan where they can make Roth or pre-tax contributions. Employer contributions are immediately vested, which means all employer matching funds you receive are yours to keep as soon as you receive them. Employees must contribute 4% to the plan to receive a 4% employer match. US Bank also offers a cash balance pension plan to employees. This account is funded solely by US Bank and employees are fully vested after three years of service.

OptumCare Retirement Benefits

OptumCare employees have access to a 401(k) plan, which is common among private employers. After one year of service, employees may contribute 6% if their eligible pay to receive an employer match of 3.5%. Company matching contributions are 100% vested after two years of service. Higher-level employees may have access to an executive savings plan (ESP), which could allow you to save even more money for retirement in a tax-advantaged manner. Employees may also be eligible for the employee stock purchase plan (ESPP), which allows them to purchase employer stock at a 10% discount.