Stretching the Match May Produce Unintended Consequences for NHCEs

A Vanguard study focusing on non-highly compensated employee (NHCE) behavior finds higher match thresholds are typically associated with lower plan participation and lower employee contribution rates.

Studies have shown an employer matching contribution is a motivator for employees to save in their defined contribution (DC) plans, and many choose a deferral level that maximizes their matching contributions.

This has led to the idea that stretching the match—e.g. matching 50% of 8% of pay instead of 100% of 4% of pay—will encourage participants to contribute more to their plan. But, a study from Vanguard suggests this may not be true.

The study is based on 328 voluntary enrollment plans with 452,783 eligible non-highly compensated employees (NHCEs) in 2016. Each of these plans has a single- or multi-tier match formula, and Vanguard limited its study to eligible employees in voluntary enrollment plans, because the defaults chosen in automatic enrollment plan designs have a strong effect on plan participant behaviors. Absent a case study of a plan that stretched the match, Vanguard analyzed a group of plans, pairing certain plans with others that had match formulas that mimic or simulate the stretched match strategy. For example, 100% on 3% of pay paired with 50% on 6% of pay, 100% on 4% of pay paired with 50% on 8% of pay, and 100% on 5% of pay paired with 50% on 10% of pay.

Controlling for employee demographic variables, plan design features and employer characteristics, Vanguard found that higher match thresholds are typically associated with lower employee saving rates. The 100% match plans had participation rates that are 20% to more than two times higher than the plans that stretch the same match value to a higher threshold.

NHCEs had higher predicted employee-elective deferral rates in 100% match designs than in the paired stretched match designs. Elected deferral rates were 73% higher in designs with a 5% match value, 67% higher in the 4% match value plans, and 31% higher in the 3% match value plans. The estimated deferral rate for the 100% match designs results in participants’ receiving more of the full promised match. Plan contribution rates, which include the value of the employer match, were more than double in designs with a 5% or 4% match value and about 40% higher in the 3% match value plans.

Vanguard concludes that stretching a match may have unintended consequences for NHCEs. “Alternatively, strategies such as automatic enrollment with strong initial default deferral rates and automatic annual deferral rate increases, coupled with stretched matches, could be used to improve saving rates,” it says.

Vanguard’s study report is here.