Match Contributions Help Boost Savings and Engagement

Retirement plan advisers can help their plan sponsor clients fully understand the power of the match and how it can boost engagement in the plan, says a Hearts & Wallets study.

An employer-sponsored retirement plan match contribution can more than double average annual plan participant savings, especially for moderate-income households, according to a Hearts & Wallets study.

In addition, when it comes to retirement income, older investors have an exploding but unmet need, up 27% in two years, for help managing their retirement resources, the study found.

One key part of the retirement puzzle is helping savers accumulate better nest eggs; the other is helping older investors tap into their resources in more effective ways, Hearts & Wallets says. The study report, “Retirement Income Programs & Employer-Sponsored Retirement Plan Engagement,” examines trends in employer-sponsored retirement plans, and presents Hearts & Wallets’ biannual benchmarks on retirement income programs, most desired plan components and industry leaders.

The top takeaway for plan sponsors, says Laura H. Varas, principal of Hearts & Wallets, is that the plans they offer are vital to their employees’ financial well-being. “They are one of the best available vehicles for accumulating savings,” she tells PLANSPONSOR. All the more reason, then, Varas emphasizes, for plan sponsors to address the recent dip in participation and eligibility, though it is relatively small.

According to Hearts & Wallets’ data, the past year saw average annual household savings increase almost a full percentage point to 5.5%, up from 4.6% in 2013. But this rise in savings did not find its way into employer-sponsored retirement plan savings, which dropped 7 percentage points in one year: Retirement plan savings dipped, from 29% in 2013, to 22% in 2014. Eligible and participating households fell, from 60% in 2013, to 56% in 2014.

Varas contends that a jump start to employer-sponsored retirement plans is sorely needed to reverse declining savings and participation rates in workplace plans, since they are a substantial source of retirement funding for many Americans.

NEXT: Matches vary by employer, but all can motivate savings.

Plan sponsors need to understand the power of the match and plan messaging. Although average rates by motivations for participating make it look like all motivations are about the same, those averages are misleading, because employer matching policies are so varied, Varas points out.

Nationally, about 10% of savers eligible for a workplace plan say their employer offers a match of 6% or more; 33% say the match is 4% to 6%; 33% say it’s up to 3%; and 24% say there is no match. The average national saver will defer $1,200. “If the importance of getting the match can be grown from one to 10, that increases the average saving rate by $1,400—to $2,600,” Varas explains. 

Participation and eligibility, a function of regulation and of cost, should be addressed, Varas says. “The average household nationally sent 22% of their savings to their workplace retirement plan, combining both participants and non-participants,” she says, “down from 29% the prior year.”

A couple of reasons, such as competing financial goals, are responsible, for the dip in contributions. “Nationally, the top most popular goal was to build up an emergency fund,” Varas explains, “rising from 37% of all households to 45% last year. This goal was very popular with younger savers. Having liquid reserves to draw on if needed is the bedrock of solid financial behavior, so it makes sense for households to make sure they have this covered before they start to save for distant futures.”

A decline in eligibility, from 60% down to 56% nationally, was another factor, especially for younger American savers. “The biggest decline was in emerging life-stage investors,” Varas says, “those ages 21 to 27, where the decline was from 64% to 41%. This is possibly because fewer young people are in jobs that offer employer-sponsored plans. Most households who are eligible do participate, so the bigger problem is getting more households eligible.”

She emphasizes that it is not Hearts & Wallets’ place to determine the best way for a company to compensate its workforce or the mix—but the match is a great way to encourage savings and also to give a portion of compensation in the form of that match.

“With low interest rates in recent years, there has been such a penalty on savings,” Varas says. “Match becomes such a silver lining.

More information about the study is on Hearts & Wallets’ website.