If You Match It, They Will Save, Study Says

In a new report, Charles Schwab says there is a strong connection between a plan sponsor’s company match contribution formula and participant savings rates.

From 2004 to 2007, employees at companies with retirement plans serviced by Schwab were most likely to choose the plan’s “match ceiling” (the amount of salary employees need to defer into their plan in order to receive the maximum employer matching contribution) as their deferral level in order to maximize the employer contributions they can receive. As an example, Schwab said that among plans it services in which employers offer a 6% matching contribution, 20% of employees selected 6% as their deferral rate, which is the most concentrated deferral level and more than double the next largest participant contribution percentage in these plans.

The link causes sponsors to consider carefully their match formulas to help employees boost savings, according to the report. Considering two formulas—a 100% match up to 3% of an employee’s compensation and a 50% match up to 6% of an employee’s compensation—the second formula would encourage an employee to defer an additional 3% into the plan to receive the maximum employer match, while the maximum cost of the match to the employer remains the same, Schwab points out.

“Employers who are focused on increasing their employees’ savings rates should consider adjusting their match formula, because we know that the employer match amount is one of the most important factors in driving an employee’s savings rate,” said Dean Kohmann, vice president of Charles Schwab retirement plan services, in a press release.

The most common employer match formula according to Schwab data is 50% of an employee’s deferred salary up to 6% of compensation. Thirty-six percent of Schwab’s plan sponsor clients have adopted a 6% match ceiling for their plan

From 2004 to 2007, Schwab saw a steady increase in the number of employers instituting a matching feature in their plans, especially among larger employers, according to the press release. In plans with more than 2,500 participants, the number of employers providing a match has jumped from 78% in 2004 to 88% in 2007.

The Schwab data also indicate that employer match levels increased in small and mid-sized plans. Across all sizes of plans included in the report, the level of employer match increased just over 1% from 3.15% in 2004 to 4.19% in 2007.

More information is available at www.schwab.com.