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Contribution Rate

The Contribution Rate in the 401(k) industry typically refers to the percentage of an employee’s pay that is contributed to their 401(k) plan. There are two types of contributions that can be made to a 401(k) plan:

  1. Employee Contributions: This is the amount of money that an employee elects to transfer from their paycheck directly into their 401(k) plan. The contribution rate here is a percentage of the employee’s salary or wages. For example, if an employee has a salary of $50,000 per year and elects to contribute 6% of their salary to their 401(k), their annual employee contribution will be $3,000.
  2. Employer Contributions: Many employers offer to match the contributions made by their employees up to a certain percentage of the employee’s salary. This employer match has its own rate and is also considered part of the contribution rate. For instance, an employer may match 50% of the employee contributions up to a maximum of 6% of the employee’s salary.

The total contribution rate would be the sum of both employee and employer contribution rates. There are annual limits to how much can be contributed to a 401(k) plan, which is set by the IRS. These limits can change annually to account for inflation and other economic factors.