Column-Are 401(k) matching contributions all they are cracked up to be?
- When you are saving for retirement in a 401 account, the standard advice is to put aside enough to capture your employer’s matching contribution. That makes sense, since the contribution represents a risk-free 100% return on every dollar you save.
That hammer, she said, includes the rise of plan features like automatic enrollment, auto escalation of contribution rates and higher initial default contribution rates. “These are the things that, without opening your eyes or engaging in any way, cause people to participate and save more over time,” she added.
More concerning is the finding that employer contributions exacerbate pay inequity. The contributions are highly concentrated, with 44% of dollars accruing to the top 20% of earners. “Higher-income people tend to participate more, and they also tend to contribute more,” said Greig. Improved access to workplace saving plans also could help greatly. Only about half of private-sector U.S. workers are covered by an employer retirement saving plan at any given time - and that figure has not budged much over the years. The lost opportunity to save at the workplace translates into far too many people retiring only on Social Security.
The most common match programs use percentages - for example, 50% of an employee's contributions up to 6% of pay. Some plans contribute regardless of what the employee does. And some have employer contributions up to a dollar cap - for example, a 10% match on 6% of pay but capped at $6,000. But the researchers found little difference in employee contribution rates across various formulas.
Plans that pair auto-enrollment with a dollar cap scored highest for equitable treatment of employees, Vanguard found. “Auto-enrollment causes everyone to benefit from the employer match, rather than leaving people to make the choice to not participate at all,” said Greig. “And that is really important in terms of equity.”Scan QR code to install app
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