Plan Design Can Help Participants Get the Full Company Match

Advisers can help retirement plan sponsors design their plans and financial wellness programs to get participants to defer enough to receive the company's matching contribution.

An analysis from Fidelity Investments shows more than one in five employees (21%) do not contribute enough to their 401(k) to take full advantage of their company’s matching contributions.

Meghan Murphy, director at Fidelity Investments in Boston, understands that people have a lot of competing financial priorities. She tells PLANSPONSOR, many young employees ask how to save for retirement and pay student loan debt; Generation X is paying for day care, their own student loan debt, and saving for their children’s college education; Baby Boomers are taking care of parents. “There’s a lot in people’s lives competing with retirement contributions,” she says.

Joleen Workman, AVP of retirement at Principal, based in Des Moines, Iowa, adds that for many, retirement can seem far away, and sometimes the immediate needs of today get prioritized over saving for tomorrow. “It really comes down to balance. It’s always important to pay yourself first, meaning make sure you set aside your savings before allocating your monthly budget elsewhere, instead of saving whatever’s left at the end of the month,” she says. “We know from our behavioral research that when we can automate big savings decisions, and supplement that plan design with education, people will save more.”

Retirement plans and company match contributions are big benefits employees value, so they should be encouraged to save at least enough to get the full match, according to Murphy. She revealed that Fidelity’s analysis found of the 21% not deferring enough to get the full match, roughly half are only one to two percentage points away. “That small bump could make a huge difference in their retirement savings,” she says.

There are things plan sponsors can do to help employees contribute enough to take advantage of the full employer match. Murphy notes that many new employees are automatically enrolled in their 401(k)s, but employers don’t always choose a default deferral percentage that will get employees the full match. She points out that the most common default deferral percent is 3%, but the most common match formula is 50% of the first 6% of salary deferred. Murphy would advise employees to make it their business to know how much is needed to get the full match, but plan sponsors could also raise their default deferral level.

“This is a trend that we see happening,” she says. “Forty-eight percent of plan sponsors still use 3%, but five years ago, 60% were. Now, 51% are defaulting at a deferral level higher than 3%.”

NEXT: Auto-escalation and financial wellness programs

Workman adds, “We see truly remarkable results that come with best-in-class plan design. The combination of automatic enrollment and auto-escalation make it easy for people to make solid financial choices, which ultimately can lead to life-changing savings over time. Overwhelmingly, we see people stick with the plan when their decisions are automated.”

According to Murphy, 75% of plan sponsors use automatic deferral escalation, where employees can opt in to auto-escalate. There’s also a trend of employers automatically enrolling employees into auto-escalation. “That number has gone from about 11% five years ago to about 16% now,” she says. “Employers recognize inertia—that people don’t tend to review their savings each year.”

Financial wellness programs can also help. “Many times employees say they just can’t afford to save more, but if plan sponsors and providers help with other financial decisions—a plan for paying down debt, knowing know how much they can afford for a home or car, budgeting—we hope to get them in a better spot to contribute to their retirement accounts.”

Workman concludes, “The more plan sponsors can do to make it easy for their employees, the better off [employees will] be financially.”