Home Retirement Why Retirement Savings Match Needs To Be Reinvented by Employers

Why Retirement Savings Match Needs To Be Reinvented by Employers

by Michael Webb

One of the U.S. retirement investment system’s building block is the Employer Match. According to a recent Plan Sponsor Council of America (PSCA) survey, 54% of employers will also contribute if employees contribute to their retirement savings. By helping people prepare for retirement, the match increases employees’ financial stability while giving employers more flexibility.

These are difficult times, but the present crisis is an opportunity not to abandon but to reinvent it.

For businesses struggling to pay their match, there are ways to cut costs while empowering saving staff. And for businesses not contemplating suspensions or cuts, strategies will maximize the match ‘s effect on savings actions.

In this post, we’ll address two solutions that can boost dollar matching effectiveness and performance. The first is a fixed-dollar match, like $1,200 per employee. The second is extending the match. For example , businesses might offer 30 cents on the dollar up to 10 percent of the pay instead of matching up to fifty cents on the dollar. To appreciate the effectiveness of these methods, knowing the behavioral research that informs them is useful, so we’ll start our discussion there.

The Match Science

Evidence indicates matches boost enrollment, usually 3-10 percentage points. Yale finance professor James Choi and colleagues looked at a business that launched a match in one report. They noticed the match improved employee participation by around five percentage points.

Another way matches promote savings involves the match cap, which affects workers for at least two reasons: they don’t want to lose out on the employer’s contribution, and they could treat the cap as an implied suggestion for how much to save. In another study, Choi and colleagues researched a business that launched an employer match with a 4% pay limit. Within six months, almost one-third of new participants selected 4 percent as their savings rate — an almost six-fold rise.

While employees respond to match and match limit, they are generally indifferent to match cost, which is the amount of cents the employer contributes for every dollar the employee saves. (If a business spends 50 cents per dollar saved, it has a match rate of 50%.) Why? There are no benchmarks to direct employee decisions, nor do employees feel strong about what a standard match should be. Research shows that when there’s no benchmark for judging numbers, or when understanding numbers requires effort, we prefer to ignore them.

Given these research results, let ‘s analyze the existing match formula. The match is set as a percentage at the vast majority of companies; as stated, the most common formula is 50 cents on dollar up to 6 percent pay. This mix would nudge employees to save 6%—which is typically not enough for a safe retirement.

We suspect a percentage match often doesn’t inspire any employees to participate. Many people struggle with figures (and percentages in particular), making it hard for them to fully understand the match’s meaning. Some leave matching dollars on the table.

The Best Match

Let ‘s look at the two ways we’ve found to strengthen the formula for employers and workers alike.

The first is planned to save more lives while helping businesses struggling minimize costs. It allows employers to match a fixed-dollar sum rather than a pay-percentage. For example , if a business saves enough, it might give all its employees $1,200 annually. That’s the equivalent of matching 50 cents on the dollar up to 6 percent of the pay for someone earning $40,000 a year, and it’s less than a match’s average cost.

A fixed-dollar match has this advantage: simply and certainly. Research by Oregon University professor Ellen Peters and colleagues indicates that figures frequently sound abstract and are therefore easy to overlook. By comparison, a fixed-dollar sum encourages us to think about what we can do with that extra cash — a thinking pattern that can make it harder to leave the money on the table. Psychologically, forgetting a “6 percent match” is simpler than passing “$1,200.” And the fixed-dollar solution may be more beneficial for low-income employees, for which the set sum would represent a greater share of salaries.

The second solution is suitable for employers looking to slash current costs while promoting potential savings for employees. It’s known as stretch match, and while it’s not a novel concept, it can help businesses postpone matching costs while we’re in recession.

For example, instead of providing up to 6% pay for 50 cents on the dollar, employers might offer 25 cents up to 10% or 15% pay. In the short term, they could save money — maybe half of their matching costs. And if employers change their investments to match limit, they’ll set more aside for retirement. This will happen gradually and hopefully as the economy improves, which would favor jobs, firms, and society in the long-term.

One potential problem with the stretch match is that a high cap could demotivate employees who, particularly now, seem unlikely to set aside 10% or 15% of their salary. Thus, employers can promote participation by using an incremental savings escalator, which gradually raises the savings rate by 1% or 2% each year before employees hit a recommended amount. Such escalators have helped more than 15 million Americans boost their savings.


By following one of these methods, businesses will show their contribution to adequately funded employee retirement while keeping costs in check. Of course, these are not the only methods that may benefit employees and employers, and they might not suit all businesses. We urge employers to think about cutting or removing the match to consult with their plan advisors on how to maintain it more efficiently.

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