Maximizing Your 401(k) Match – If You Build It, They Will Save

Maximizing Your 401(k) Match – If You Build It, They Will Save

Increasing participation in your company’s 401(k) plan is vitally important to maximize widespread benefits to your company and your employees:

Pass testing, resulting in fewer/no refunds to higher-paid employees
Increase employee balances, giving them higher odds of retiring on time
Increase employee morale and productivity
More leverage with service providers to provide better services and lower costs

 

GET THE LATEST BREAKING NEWS HERE -- SIGN UP FOR GOLOCAL FREE DAILY EBLAST

The most effective way to increase participation in your company’s 401(k) plan is by offering a matching contribution. However, how you structure that match is critical to the success of the program.

Far too often, a company will offer a “flat match,” or 100% up to a certain amount, say 1%, 2% or 3%.  The amount at which you match “up to” (let’s call this the denominator) is very likely to be the amount at which your employees will save – no more, no less. It has been ingrained in people over the years to save at least as much as the company will match. The problem is that a large number of those people have taken that to mean they should save exactly the amount of the match (again, the denominator).

Behavioral finance principles tell us that employees will go where you tell them to go. Or, in other words, if you match up to 3%, the large majority of your employees will save exactly that – 3%.

By “stretching” your matching contributions, you get higher plan participation at the same cost to the company. For example, a very common 401(k) match is 50% of the first 6%. That means if an employee saves 6% of their paycheck, the company will match half of that amount, or 3% of the paycheck. By changing that denominator, you raise the bar for the employees, and they will now save 6% because they don’t want to miss out on that matching contribution.

There are many ways to create a formula to fit your budget. A 2% match budget can be offered at 50% of the first 4%, or even 25% of the first 8%. A 1% budget can be offered at 25% of the first 4%, or even 20% of the first 5%. And if you can afford a larger amount, say 4% or 5%? Stretch that out to 50% of the first 8% or 10%. If the reward is there, your employees will save enough to get it, oftentimes without thinking twice.

Be careful not to stretch it too thin though or you will start to lose the benefit. If you only have a 1% budget, a 10% match on the first 10% may be counterproductive, as your employees may not see the value in saving all the way up to 10% to receive a relatively small amount.

Employees look to their employer for advice on what to do, whether directly or subliminally. By raising the denominator, you’ll incent employees to follow suit. Like in the movie Field of Dreams, if you build it, they will come. It’s important to build it correctly to maximize the benefit for you and your employees.

Investment Advisory services offered through Global Retirement Services (GRP), DBA Hilb Group Retirement Services, a registered investment advisor.

Jim Sampson, Director of Retirement Advisory Services, Hilb Group Retirement Services in Warwick, supporting retirement plans for companies and their employees for the last 24 years, and is the co-author of the book Save Like a Champion Today, A Winning Game Plan for Retirement.