• Match employee contributions. Three-quarters of employers that offer 401(k)s or similar defined contribution plans match employee contributions, according to the Society for Human Resource Management (SHRM). Anecdotally, many employers match 50 percent of the first 6 percent of pay a participant saves.
There is strong evidence that matching contributions encourage workers to save for retirement. The National Bureau of Economic Research reports that matching contributions not only encourage retirement savings but incent workers to boost contributions.
Matching retirement plan contributions is an investment by an employer in the retirement preparedness of employees. It should send a clear message that an employer values and encourages employees to do all they can to help prepare to retire. In addition to discussing specific retirement plan savings initiatives, it’s equally important to educate employers on ways to potentially get the most out of matching contributions by establishing simple matching formulas, communicating regularly to remind workers of the incentives, and reporting matches as well as contributions simultaneously to reinforce positive behavior.
• Boost matching contributions. So how could an employer that already matches contributions encourage more savings? Recent news reports noted that some sponsors boosted their match to 75 percent or even 100 percent of what participants contribute, providing a stronger incentive to save. Increasing the match may encourage more workers to start saving for retirement or incentivize those who are already saving to save more. As more employers enhance their retirement savings plans, the competition to attract and retain workers with richer retirement benefits is likely to intensify.
• Stretch the match. “Stretching” the match increases the maximum percentage of pay on which an employer bases its matching contribution. Instead of matching 50 percent of the first 6 percent saved, for instance, sponsors could match 50 percent of the first 8 percent saved to encourage participants to save at a higher level. However, it’s important that the maximum savings rate that an employer matches is affordable for the typical employee.
• Combine approaches. Another consideration for employers is to simultaneously increase and stretch matching contributions to potentially encourage higher levels of savings.
Closing The Gap
The best retirement plan enhancement opportunities will differ for each employer based on a variety of factors, including their human resources strategy, benefits budget and employee demographics. But many plans have opportunities for improvements and conducting a thorough analysis can have profound, long-term implications for workers’ prospects for long-term financial security. A thorough analysis can also help employers better manage their costs for salaries and benefits as their employees age, helping workers prepare to retire comfortably on their own terms.
The end game is to close the retirement “confidence gap” by helping today’s workers remain confident about their retirement prospects, not only today but well into retirement.
Una Morabito is head of client management for the workplace solutions unit of Massachusetts Mutual Life Insurance Co. (MassMutual), responsible for supporting employers as they work to make their retirement savings plans run as effectively as possible.