Employer matches can be a disincentive to save more for retirement

The financial crisis of 2008 had an unintended consequence which was that employers stopped putting matching contributions in their employees’ 401(k) accounts. According to a recent Plan Sponsor Council of America report, “Annual Survey of Profit Sharing and 401(k) Plans,” 65 percent of plans that offer a match provide a fixed match, while 35 percent offered a graded match.

Arnerich Massena, Inc. released a report this month looking at the effects of matching on a plan.  According to the analysis, many reports suggest that an employer match increases employee participation in a plan. Other research finds that since many plans automatically enroll participants into a plan with a match, it is hard to distinguish who is choosing to participate because of the match and who isn’t.

“Ironically, some forms of employer contributions, such as maintaining a separate defined benefit plan or profit sharing contributions can be a disincentive to participation in a defined contribution plan. Employees may feel as if they are already building up enough of a nest egg through employer-provided funds and that there is thus less need to save for retirement on their own,” the report said.

Employer matches can have a demotivating effect on employees, according to the report. Many people will contribute just enough to their plan to capture the employer match, but no more. So in a sense, the match serves as a “disincentive for employees to increase their savings rate beyond the level of the match,” the report said.

An extremely generous employer match has the safe effect as providing a defined benefit plan or profit sharing contributions because employees feel that their retirement is already taken care of and there’s no need to boost their own savings rates above the rate necessary to receive the match.

One way to counteract this behavior is to offer automatic deferral increases. This trumps employee inertia and also gives them a different way to view their retirement savings.

According to the report, one of the main reasons employers offer matches is to attract and retain personnel.


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