In two-thirds of plans, employer contributions exacerbate pay inequity. Here are some key findings of the survey:

Employer contributions are highly concentrated in the hands of top earners
Top earners received an 11% larger share of employer contributions than benefit income
In two-thirds of plans (68%), the top 20% of earners received a larger share of employer contributions than income. Many common formulas, including safe harbor designs, disproportionately benefit higher-income employees.
Higher-income workers are more likely to participate and save more in the plan, resulting in larger matches
Even among workers with similar incomes, more than half of employer contributions accrue to just a third of workers

Thoughtful plan design can improve outcomes. "Basically plan features that disproportionately increase participation and savings among lower income workers will likely result in more equitable outcomes," said Fiona Greig, Ph.D., global head of investor research and policy in Vanguard's Investment Strategy Group. These are the plan design features that Vanguard recommends:

Auto-enrollment
Immediate eligibility for participation, employer contributions, and vesting of employer contributions
Setting the default savings rate equal to the maximum match rate (e.g. if the match is $1 for $1 up to 6% of pay, then set the default savings rate at 6%).
More equitable employer match designs: e.g. nonelective contributions, matches with dollar caps (rather than % of income caps)

Employers should evaluate their plan design, along the following three dimensions, according to Vanguard:

Equity: Are employer contributions equitably distributed? In other words, many employers distribute their match contributions to their employees in different income groups. Given that matching contributions are typically awarded as a proportion of salary, the top 20% of earners receive 44% of employer contributions, while the bottom 20% receives just 6%.
Efficiency: Does the plan design encourage savings? An employer match is more efficient if it creates financial incentives for workers to save more. These financial incentives affect only workers who contribute up to the maximum match: These workers receive an employer match for every dollar they save. A match does not, however, create financial incentives to save more for those who save above the matching cap.
Cost: How costly is the plan? Employer contribution budgets can be large: One in four plans spends more than 6% of compensation on employer contributions. Overall, Vanguard found that a dollar cap on matching contributions correlates with greater equity and lower costs. Employers could prioritize plan features that promote savings for lower-income workers, such as auto-enrollment, a higher default savings rate or immediate eligibility.

"I don't think dollar caps are the silver bullet or even the thing I would start with," said Greig, who said she would emphasize auto-enrollment, immediate eligibility and setting the default savings rate equal to the maximum match rate. "And I would probably add a non-elective match before suggesting a dollar cap," she said.

Instant Insights /

Employers need to optimize all 401(k) matches, not just high earners: Vanguard

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