Generous matching contributions to 401(k) or similar plans
can be an effective recruiting and retention tool, increasing employees' total
compensation and helping them to build their retirement savings. Choosing
appropriate automatic enrollment and auto-increase plan defaults can also help
employees build retirement security.
New reports from retirement plan service providers give a
snapshot of average, and above-average, plan features, which can help employers
see how their retirement plans might look to job candidates.
"To help employees understand the value of employer
retirement contributions, present them as part of the total compensation the
employee receives," advised Fidelity Investments. "It's money they
receive today to help them live well in the future."
Matching Formulas
Advisory firm XpertHR's 2021 Employee Benefits Survey found
that among the 271 surveyed employers that offered a traditional 401(k) plan,
82 percent matched at least some portion of employee contributions to the plan,
compared with 18 percent that provide no matching funds. The survey was
conducted from March 30 to April 23 among employers of various industries and
sizes.
According to investment firm T. Rowe Price, the top five
employer-match formulas used by defined contribution plans last year were:
50 percent up to 5 percent of pay (20 percent of plans).
100 percent up to 3 percent of pay + 50 percent up to the
next 2 percent of pay (19 percent).
100 percent up to 4 percent of pay (12 percent).
100 percent up to 6 percent of pay (11 percent).
100 percent up to 5 percent of pay (9 percent).
The findings are from Price's Reference Point benchmarking
report, based on data from 674 plans for which the firm provided a full range
of services last year.
Fidelity Investments' Employer Contribution Trends report
for 2020 has similar results, finding that the most common matching formulas,
based on 7,506 corporate defined contribution plans offering employer matches,
were:
100 percent match on 3 percent of pay + 50 percent on the
next 2 percent of pay (41 percent of plans).
100 percent match on 4 percent of pay (15 percent).
50 percent match on 6 percent of pay (8 percent).
100 percent match on 5 percent of pay (6 percent).
100 percent match on 6 percent of pay (7 percent).
Among the 1,700 employer-sponsored plans for which
investment firm Vanguard provided record-keeping services last year, the firm's
How America Saves 2021 report disclosed that:
50 percent of Vanguard plans provided contributions through
an employer match.
36 percent provided both employer matching and nonmatching
(discretionary) contributions.
10 percent provided only profit-sharing or other
discretionary contributions.
4 percent made no employer contribution.
In addition, the firm reported that most plans promised a
match of between 3 percent and 6 percent of pay; the average value of the
promised match was 4.5 percent of pay. Vanguard's report didn't provide a
breakdown of match formulas.
Stretch Matches
Some plan sponsors employ "stretch the match"
formulas, requiring that employees contribute a higher percentage of their pay
to receive the full employer match. For example, rather than provide a 100
percent match on an employee's contribution of 4 percent of pay, the employer
would match 50 percent up to a contribution of 8 percent of pay.
Fidelity found that "stretching the employer match
formula can encourage higher savings rates among employees, helping them to
save at necessary levels to be retirement ready."
Vanguard, however, said its research has found that higher
match thresholds were typically associated with lower plan participation and
lower employee contribution rates.
Whether stretch matches will raise or lower savings rates at
an organization may depend on different workforce demographics—for example, how
much the average worker earns and whether employees have sufficient
discretionary income to increase their default contributions.
Vesting Periods
While 7 in 10 Vanguard plans allow employees to make
voluntary contributions immediately after their hire date, employers often
delay letting employees vest in matching funds and other employer
contributions.
"A one-year eligibility rule is more common for
employer contributions, presumably because employers want to minimize
compensation costs for short-tenured employees," Vanguard reported.
XpertHR found that among the 222 responding companies that
provide matching funds, 28 percent fully vest their employees in these funds
immediately, while most require a waiting period.
"While employers often provide matching funds for their
traditional 401(k) plans, most require wait times—sometimes up to several
years—for employees to become fully vested in those employer
contributions," noted XpertHR survey editor Andrew Hellwege.
These waiting periods to vest in employer matching
contributions vary, and respondents noted several time frames of up to six
years, with the top three vesting periods being:
Up to five years (17 percent of plans).
Up to three years (14 percent).
Up to one year (13 percent).
Automatic Enrollment
At year-end 2020, 54 percent of Vanguard plans had adopted
automatic enrollment, and that figure was higher—74 percent—for plans with at
least 1,000 participants.
Two-thirds of automatic enrollment plans have implemented
automatic annual deferral rate increases. Additionally, auto-enrollment
defaults have increased over the past decade: 57 percent of plans now default
employees at a deferral rate of 4 percent or higher, compared with 30 percent
of plans in 2011, Vanguard reported.
An overwhelming 98 percent of plans chose a target-date fund
as the default investment.
T. Rowe Price reported that last year among the plans for
which it provides services:
81 percent had adopted auto-enrollment, up from 69 percent
in 2015.
62 percent automatically increase participants' deferral
rates each year unless the participant opts out, up from 51 percent in 2015.
36 percent used an auto-enrollment rate of 6 percent of pay
or higher, while 30 percent had a 3 percent default rate.
Among Fidelity's auto-enrollment plans, 48 percent of
employers were using a 4 percent auto-default rate, and 42 percent were using a
3 percent rate.
Automatic Contribution Increases
Annual automated deferral increases resulted in participants
saving 20 percent to 30 percent more after three years than employees without
automatic increases, Vanguard found. Among plans with an automatic increase
feature, the most common auto-increase rate for employee contributions is an
additional 1 percent of pay each year, used by 67 percent of plans.
The largest group of employers, 46 percent, stop automatic
increases when an employee's annual contribution rate reaches 10 percent of the
employee's pay, Vanguard reported. However, 26 percent cap auto-increases when
contributions reach 11 percent to 20 percent of pay, while 13 percent use a cap
of 6 percent of pay. Five percent of plans had no cap on automatic increases.
Staying the Course
According to T. Rowe Price, employees' average contribution
rate for 401(k) or similar plans ticked up from 7.6 percent of pay to 7.8
percent last year. That slight improvement during a challenging year
"could be connected to several factors, including plans adopting
auto-increase, increasing the match ceiling, and perhaps a participant
population better educated in financial wellness and the benefits of saving for
retirement," the firm noted.
At the end of last year, higher savings rates "combined
with the fact that the majority of participants did not react to the market
volatility by making withdrawals from their accounts, contributed to the
overall average balance increasing by 13 percent over 2019," Price
reported.
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