As the chart above details, a one-size-fits-all match formula doesn’t exist for Plan Sponsors. Indeed, each institution must determine a match that will entice participants but not negatively impact the organization’s bottom-line. A 3% overall employer match may make sense for one organization, however another organization may determine that a 6% employer match is more suitable for their population, industry and company budget.
Once an organization arrives at the match amount, the Plan Sponsor may further nuance the match implementation. For example, the organization that offers a 3% match may choose to match either 100% or 50% of each employee dollar deferred. With the 100% approach, the employee can defer 3% of his or her pre-tax compensation and enjoy the full match benefit. With the 50% approach, the employee would need to defer 6% to receive the full match benefit. The latter approach provides an incentive for the employee to defer more. A match approach that seeks to maximize employee deferrals inherently leads to better retirement outcomes for participants while not necessarily creating a greater financial burden to the organization.
Other 401(k) Plan features may also impact the economics of the organization’s match. Namely, automatic enrollment programs generally lead to higher match contributions from the organization as more employees enter the Plan. Likewise, implementing automatic deferral escalation results in higher participant deferral rates and therefore, greater match dollars paid by the organization.
Any organization that reviews its match policy should take a holistic approach to evaluating all the relevant factors. Often times, the Plan’s recordkeeper can assist with modeling outcomes under different match structures that can provide insight into an organization’s bottom-line but also participants’ retirement outcomes. Similarly, a periodic review of participant deferral rates can help determine if the match formula can be stretched to encourage higher deferrals. Ultimately, the exercise can lead to an all around better benefit for participants.
