The Power of Employer Matching: Encouraging Better Savings Rates
One of our clients recently asked if they should restructure their employer contribution as a match (they had been giving all their employees the same non-elective contribution amount – a “gift,” if you will). My answer: Yes! Matching contributions increase plan participation and encourage better savings rates. Going back to basic savings principles, the thing that will have the most impact on a person’s retirement savings is, first and foremost, their savings rate.
Employer Matching: The Research
Two papers discuss the effect of a match and increased participation in depth. One paper, titled “Matching Matters in 401k Plan Participation,'' was published by the Department of Labor Statistics in 2010. Here’s what that study found:
“The results of the study provide further evidence that employer matches provide a powerful incentive for employees to participate in their 401(k) plans, and that the level of the matches offered matters significantly.”
The second paper was from the National Bureau of Economic Research’s 2012 paper on the impact of matching contributions. It states the following:
“Conditional on participation, a higher match rate has only a small effect on savings plan contributions…In contrast, the match threshold has a substantial impact…it serves as a natural reference point when individuals are deciding how much to save and may be viewed as advice from the plan sponsor.”
In other words, the takeaways from these papers are:
Matching increases plan participation, especially encouraging those that have low predispositions to participate.
And, there’s a sweet spot. We know that a match is important for enticing employees to contribute, but if it’s too high, it wears off.
We also know that employees are taking the match cap as a suggestion for how much they should save.
The last bullet is particularly important (or rather, particularly a problem). These begs plan sponsors to be mindful of how they construct their match, especially if it’s going to be viewed as an anchor as the implied “right” amount to save.
So how should you construct your match? Remember, according to many financial experts, most people will be on track to save for retirement if they’re saving somewhere around that 10%-15% mark (mathematically speaking). If possible, try to offer a match that will get employees at least close to that target when the company match is combined with the employee contribution amount.
On top of the good behavior it encourages, the 401(k) is one of the most preferred benefits among American workers, according to Franklin Templeton. In their recent survey of U.S. employees, they found that an increased 401k match amount was the second most desired benefit behind an increase in pay. So, maybe it’s time to pay more attention to your match and raise it based on your workplace demographics and what kinds of savers your employees are.
A Word on Auto-Enrollment
Even if you can’t offer a match, auto enrollment is a another feature that can improve savings rates across the board. According to a study from Fidelity of their block of retirement plans they recordkeep, between 80% and 90% of employees who are automatically enrolled into a plan don’t opt out. On top of that, opt-out rates do not change when higher enrollment percentages are taken into account (i.e. enrolling at 6% versus 10%). Again, being wary of setting an artificial anchor for employees as a “suggested” or “right” contribution amount, consider two things: aim higher for your enrollment percentage since the same amount of employees will remain in the plan, and consider an annual automatic increase to nudge employees into contributing more over time. (Only add auto features if your payroll can support it!)
Takeaways
Matching makes a difference - it encourages people to put more money into the plan.
A match that’s too high can be a deterrent and too low won’t help your employees reach their goals. You need to know your employees and their financial prowess and savings tendencies.
Employees do take the match and the auto-enroll amounts as “suggestions” for how much to save.
Auto-enrollment and/or auto-increase can help encourage employees to save.
If you need help with employer matching or any other aspect of your retirement plan, reach out - we’d be happy to help guide you!