Employer contributions motivate workers to save for retirement in a 401(k) plan, according to a new study. Plan participation increases to 76 percent of all eligible employees when a 401(k) match is offered compared to 70 percent when no employer contribution is available, according to an analysis of 911 401(k) plans with 755,000 participants serviced by Schwab Retirement Plan Services.
Most of the Schwab 401(k) plans (73 percent) offer some form of 401(k) match. A quarter of the retirement savers in the study contribute exactly enough to the 401(k) plan to get the maximum possible match. Schwab is encouraging employers to raise the amount workers must save to get the full match. For example, an employer might offer to match employee contributions dollar for dollar up to three percent of pay or provide a 50 percent match for each dollar saved up to 6 percent of pay. Both of these matching formulas would cost the company a maximum of 3 percent of each employee’s pay, but the second formula would require employees to save more to get the entire match. “By raising the ceiling employers can boost savings rates,” the Schwab report says.
However, increasing the amount that employees must save to get the full match can hurt workers who can’t afford to save 6 percent of pay in the 401(k) plan. A worker earning $50,000 annually who is only able to save 3 percent of pay would end up with $3,000 in their 401(k) at the end of the year if the dollar for dollar matching formula were used, but just $2,250 if the company switched to the 50 cent matching formula.
A related Schwab and Koski Research survey of 1,005 401(k) participants found that 69 percent cited the employer match as the primary reason they enrolled in their 401(k) plan. However, a quarter of the survey respondents said they did not enroll in the company 401(k) because the employer match was not high enough to justify the restricted access to their money.