The two most common mistakes
1. Paying down high-interest debt too slowly while holding low-return assets
low-return savings.
The typical investor could pay off credit card debt in less than 18 months if they reallocated extra cash toward payments.
Malena de la Fuente, Ph.D.
Vanguard Investment Strategy Analyst
Participants with high-interest debt are more likely to:
- Contribute less to their plan.
- Take loans or hardship withdrawals.
- Experience financial stress that affects productivity and engagement.*
- Be less retirement-ready.
2. Prioritizing low-interest debt over getting the full employer match
Within Vanguard-administered 401(k) plans, the research reveals a troubling pattern:
- About 50% of employees with mortgage, auto, or student loans make extra payments annually.
- 30% of these prepayers miss part of their employer match.
- The missed match comes to about $1,100 per year on average.
Notes:
We consider eligible employees at Vanguard-administered 401(k) plans in 2023. We define prepayers as those who make a payment at least $20 larger than the required minimum monthly payment in at least one of the four monthly credit pulls we observe for 2023. For each loan type, we calculate the percentage of prepayers as the share of mortgage, student loan, or auto loan holders who meet this definition for their respective loan. Because we only observe four monthly credit pulls, we obtain an annual prepayment amount by multiplying each employee’s prepayment amount by three. We then compute the additional match dollars each employee would earn by reallocating their annualized debt prepayment to the 401(k) plan, and take the average across all prepayers who do not get their full 401(k) employer match.
Sources:
Vanguard calculations, using Vanguard administrative data matched anonymously with data from Equifax.
“Riskless returns of 50%–100% are hard to come by in financial markets,” says Aaron Goodman, Ph.D., Vanguard senior investment strategist and one of the authors of the paper. “That makes earning the full 401(k) match a priority before prepaying low-interest debt.”
According to our research, prepayers miss out on almost $1,100 per year, on average. This means that in the long-term those who prepay debt for 10 years while failing to get their full employer match during that time could have as much as $120,000 less at retirement age.
Why these mistakes persist
What plan sponsors can do
Plan sponsors play a critical role in helping participants take a more holistic view of their finances. To support this, Vanguard equips participants with the tools, education, and guidance they need to make more informed decisions and improve their financial wellness.
Our Financial Well-Being Service helps participants navigate competing priorities with confidence—especially during key moments that can shape their financial future—by providing personalized guidance and clarity around choices and
trade-offs.
A clearer path through financial decisions
This service helps participants look at their full financial picture, so they can make more coordinated decisions across saving, spending, and debt. With guidance from Vanguard experts, a simple approach can help participants prioritize what to do first:
- Capture the full employer match
This should be the first priority, as it offers participants a guaranteed, immediate return that is difficult to replicate elsewhere. - Accelerate high-interest debt payoff
Participants should prioritize paying down credit card and other high-interest balances that reduce long-term wealth. - Approach low-interest debt strategically
Once the first two steps are addressed, participants can make informed decisions about prepaying mortgages, student loans, or auto loans.
As participants apply these steps, clear, relatable examples can reinforce the trade-offs involved and help inspire action:
| High-interest debt: | Missing the match: |
|---|---|
| “You’re paying about $860 a year in credit card interest while holding cash. By reallocating that cash, you could be debt-free faster and save hundreds.” | “Prepaying a low-interest loan instead of maximizing your match means you’re giving up about $900 a year—potentially tens of thousands over time.” |
The business case for action
Improved employee and workplace outcomes
Participants who better coordinate debt and savings:
- Build more retirement wealth.
- Improve overall financial resilience.
- Reduce financial stress, which is linked to:
- Better focus and productivity.
- Improved mental health and well-being.
- Higher engagement scores.
Stronger plans lead to an enhanced value proposition
Plan sponsors who provide comprehensive support for participants’ financial well-being can:
- Strengthen recruitment and retention.
- Differentiate benefits offerings.
- Reinforce commitment to employee well-being.
- Help participants achieve better retirement outcomes.
These money mistakes represent real and common financial challenges that participants are facing. Employers can help their employees by partnering with Vanguard to offer our Financial Well-Being Service. We want to work with you to improve employees’ financial outcomes and increase your plan’s overall health.