In the current retirement landscape, many plan sponsors have focused on tried and true strategies to help participants save more, such as auto enroll and auto increase. While there is no doubt these are valuable, plan sponsors are actively looking beyond them for new plan design solutions that align with broader company goals.
One idea that has been talked about informally is that of stretching a match. Practically, this means that in order for participants to get the most impact from the company match, they must defer more of their salary. The side benefit is that it encourages them to save more for retirement. Our numbers tell us this concept not only has legs, but that plan participants are willing to make significant behavioral changes in order to ensure they get the maximum matching contribution.
Also see: "How to maximize clients' retirement resources."
A recent T. Rowe Price study of 3,000 plan participants noted a meaningful shift in attitudes. One question in the study asked how likely plan participants would be to increase the proportion of income contributed to their 401(k) if they had to increase their contribution rate in order to get the maximum matching contribution from their employer. Tellingly, a full 50% of respondents said they would be willing to do this. Among millennial respondents, the percentage was even higher: 54%.
Plan participants were also asked about their contribution rate and the extent to which their deferral amount was determined by the match. Sixty-three percent of respondents said they set their rate up specifically to take advantage of the match. Only 22% said their rate was arranged to take partial advantage of the match, and just 15% indicated they set it based on factors other than the match.
These figures tell their own story and make two points very clear:
1) Participants have an appetite for increasing their 401(k) contributions;
2) with a little encouragement and incentive, participants are willing and ready to save more.
Setting up a plan
From an operational point of view, stretching a match does not involve an additional cost to the plan sponsor other than updating the plan document and communicating to participants. Rather, the plan sponsor simply takes a match that is set at 100% on the dollar up to three percent, to a match that is say, 25% on the dollar up to 12%. Effectively, this means the participant would need to save 12% rather than only 3% to get all the benefits of the company match. It should be said that in order to determine the appropriate stretch match formula for your plan, you first need to identify your plan objectives. Each plans formula will vary, depending on these goals.
The long-term implications of stretching a match are notable. Take, for example, an individual with a 50% match, up to 6%. If the employee saves 6% total, he is only going to reach about 60% of his retirement goal, which is to have enough to retire on. Most experts believe 15% is the appropriate savings goal to help reach an adequate replacement ratio at retirement.
Also see: "Inadequate retirement savings a global issue."
Alternatively, if the match is stretched and becomes a 25% match up to 12%, and the individual chooses to take full advantage and save 12%, the plan participant will have a stronger likelihood of being able to reach the goal of saving 100% of what they will need to retire. This is all to say that if even half of plan participants changed their behavior to take advantage of the stretch match, it would be a huge benefit to the plan and could help ensure more employees reach their retirement goal. Additionally, stretching a match has strong appeal for companies that have identified a retirement benefit philosophy that prioritizes the ability of its employees to retire with the right replacement ratio.
While this may sound like a lot of statistical hypothesizing, there is a great deal at stake. These shifts between contributing 6% and 12% of pay per person are significant, and ultimately have profound implications and effects on plan participants lives, both leading up to and in retirement. Considering ways to encourage increased savings may have long-term benefits for participants and can help sponsors achieve their plan objectives.
Negron is head of client services at T. Rowe Price Retirement Plan Services, Inc.
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