Employer contributions often motivate workers to save in a 401(k) plan. 401(k) service providers are encouraging employers to raise the amount workers must save to get the entire 401(k) match in order to boost savings rates.
When companies increase the amount workers need to save to get employer contributions, workers generally save more, according to a Principal Financial Group analysis of 6,560 401(k) plans that offer a maximum possible match of 2 percent of pay. For example, when companies matched employee contributions dollar for dollar up to 2 percent of pay, employees saved an average of 5.3 percent of their salary. At firms offering a 50 cent match for each dollar saved up to 4 percent of pay, employees contributed slightly more: 5.6 percent of pay. And both plans cost the company the same amount of money for matching contributions.
Giving workers a quarter for each dollar saved up to 8 percent of pay further boosted employee savings rates to an average of 7 percent of pay. But that’s not enough for most employees to get the full employer contribution under this formula. Many workers missed out on part of the match and the company saved money.
“The data tells us that while the employer contribution stays at 2 percent, the higher target deferral in the match formula is spurring participants to save more,” says Barrie Christman, vice president of individual investor services at The Principal. “This is significant because it shows that employers can incent better savings behavior without having to increase their costs.”
A Schwab Retirement Plan Services analysis of 911 401(k) plans released last month found that a quarter of 401(k) participants choose to save exactly enough to get the maximum possible employer contribution. The study notes that by raising the match ceiling, employers can boost worker contributions. However, employees who can’t afford to save at the higher rate will miss out on part of the 401(k) match.