Employer Match Changes Not Widespread Reaction

When you look at the big picture, defined contribution plan sponsors making changes to matching contributions was not a widespread reaction to the recession.

An analysis of more than 9,000 retirement plans administered by Fidelity Investments found about three-quarters of companies (72%) maintained or added employer contributions over the past five years. Only 12% terminated and did not reinstate their matching contributions, and 5% suspended their match, but have reinstated it.  

While IBM’s recent decision to move to an annual employer contribution has raised concerns (see “Senators Urge IBM to Reconsider Match Decision”), Jeanne Thompson, Fidelity’s VP of thought leadership, told PLANADVISER this was also not a widespread reaction. An analysis of 14,000 plans showed that, in the small plan market, more than 20% use an annual contribution, but in the jumbo market, 3.3% did so in 2010, and now only 5.4% do.  

There may be a variety of reasons plan sponsors move to an annual contribution, but in many cases they are not taking away the benefit for plan participants, they are reducing administrative costs, Thompson said. She added that in some cases, plan sponsors may be moving from a straight match to a performance-based contribution, and in those cases, employees who terminate may not get the contribution, but the plan sponsor’s goal is to encourage employee commitment and productivity. 

One thing Thompson found interesting is when Fidelity looked back over a 12-year period, it found not nearly as many plan sponsors reduced or suspended match during the tech bubble. Thompson said she realized this makes sense because the tech bubble was only limited to one industry, but the recession affected all markets and was a more widespread financial crisis than the tech bubble. ”But even though it had a larger impact, overall, still not many [plan sponsors] made changes,” she noted.  

Thompson shared match strategies plan sponsors may consider: 

  • Safe harbor match - Moving to a safe harbor match allows plan sponsors flexibility in formulas and eliminates the need for nondiscrimination testing, Thompson said. 
  • Performance-based match - This ties the contribution to a performance measure of the organization, so for a small or emerging business, it encourages employee productivity. In addition, plan sponsors do not have to commit to a set amount, and it allows them the flexibility to give something without over-committing. 
  • Discretionary match - A discretionary match also allows for flexibility in the match formula, and plan sponsors can change the amount from year to year without having to amend the plan document. 
  • Stretch match formula - This allows plan sponsors to raise the match ceiling; instead of matching 100% of the first 3% of pay, they may match 50% of the first 6%. “It costs the same to the employer, but incents employees to save more, and over time will have a significant impact on savings,” Thompson said. 

The analysis also showed that participants overall continued to contribute to their plans during the recession. According to Thompson, when Fidelity looked at the amount participants are contributing, it is roughly the same—on annual basis, about $5,800. She noted that account balances continued to grow: As of March 31, 2008, the average account balance was $63,300, and as of March 31, 2013, it was $81,900. “A lot of that is due to market rebound, but also participants continued to contribute,” Thompson said.  

“In talking with employers, they are really committed to providing benefits. It is a good way to attract and retain employees and maintain their workforce by making sure employees can retire,” Thompson concluded.