We'll never know if St. Valentine would've loved 401(k)s, but wecan be pretty sure he'd have liked the idea of the company match.His name, after all, has been linked to matchmaking for centuries.The earliest written reference to this appears in 1382 in GeoffreyChaucer's Parliament of Foules in the lines:

For this was sent on Seynt Valentyne's day

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Whan every foul cometh ther to choose his mate.

It seems nearly as long as St. Valentine's Day has beenassociated with lovers that 401(k)s have been associated with thecompany match.

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The employer match, while not required, has been a very popularfeature of the 401(k) plan. Still, several industry thought leadersquestion the need for matching, especially as more plan sponsorsadd auto-enrollment and auto-escalation features to their401(k)s.

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Studies in behavioral finance had brought into question theeffectiveness of matching. In a 2010 paper, researchers Choi et alfound employees—even when there was no cost to obtain thematch—often failed to do so. By focusing only on employees 59 ½ andolder, the study considered only those workers who couldimmediately obtain the match (since they were old enough towithdraw without penalty). They found the typical worker lost 1.6percent of their salary by failing to match. In the worst case, theloss was 6 percent of the worker's salary.

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Despite these results, the company match still works. Even asmall 50 percent match can work wonders over time. For example, anemployee contributing $100 a month over 30 years will have made atotal contribution of $36,000 over those 360 months. A 50 percentmatch, growing at an average of 8 percent per year, at the end ofthis 30-year period would have amassed $74,766. That's more thantwice what the employee contributed.

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Moreso, studies have shown that high matching rates will move upthe average deferral rate of employees. Brigitte Madrian's paper“Matching Contributions and Savings Outcomes: A BehavioralEconomics Perspective” showed that providing a 50 percent match upto 6 percent of pay encouraged employees to defer at a 6 percentrate. Even though the dollars offered are the same, this was betterthan providing a 100 percent match up to 3 percent since employeesgenerally only deferred at a rate lower than 6 percent (usually 3percent or 5 percent). Madrian takes this one step further andsuggests employers might better help employees by providing a 25percent match up to 12 percent of pay.

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Imagine how much retirees would have loved their 401(k) had theydeferred 12 percent a year since they started working.

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