Surveys show that employees love their 401k matching contributions – here’s what companies can do to optimize the experience for both parties
In June, 2020, During the height of the global COVID-19 pandemic, U.S. companies took an interesting stance with their employer-sponsored 401k plans – they left matching contributions alone.
Conventional wisdom had it that businesses, struggling in a rapidly-souring economy, would hit the brakes on their 401k matching contributions. After all, when times are tight, companies look to prune where they can – and steering valuable company cash into employee retirement plans may looked like a luxury business could ill-afford.
Yet that’s not what happened.
According to data from the Plan Sponsor Council of America,
approximately 90% of plan sponsors stated they would stay the course on 401k plan employer contributions, with only 2.9% considering curbing or stopping the practice.
Even in a cash crunch, it’s no surprise U.S. companies took a “full speed ahead” approach on 401k matching contributions. That’s no surprise given employee’s bullish attitudes toward employer matching plans. Data showed that employees view company 401k matching contributions in a highly favorable light.
This from the 2019 study.
— 77% of employers offer matching contributions through their 401(k) retirement plans. And for good reason—the employer match generally encourages employees to save more.
— 53% of employees say an employer match was the reason they started saving for retirement.
— 71% say taking full advantage of the match was the most motivating factor to increasing their 401(k) contributions.
Making the Most from Your Company 401k Matching Contribution Plan
Clearly, there’s a message here. While companies are showing robust resolve in keeping their 401k matching contribution plans on course, there’s always room for improvement – and companies can always take smart steps to optimize their employee’s 401k matching experience.
Getting a grip on these five facets of a properly run 401k company matching program can get you started.
Know why your company should use 401k matching plans.
There are abundant reasons why businesses need to embrace matching plans. For starters, matching plans encourage employees to make salary deferrals on their own. The increased salary deferrals will help a plan pass compliance tests.
401k matching plans also aid companies in clearing Actual Deferral Percentage (ADP) mandates. They also meet regulatory safe harbor 401k plan contribution obligations, and at a relatively low financial cost when compared to 3% safe harbor nonelective contributions.
Know where your contribution percentage match stands against competitors.
While company 401k matching contributions vary widely from business to business, companies should know how their matching programs rate against the competition. Prized company talent may not leave a job due to low 401k matching contribution amounts alone, tepid matching rates could be a contributing factor.
By and large, the average company contribution stands at 4.7% of an employee’s average salary. Given that the average employee contribution rate is 8.8%, companies can be reassured that both employer and employees are prioritizing retirement savings – for the good of both parties.
Affordability an issue, but plan matching is the way forward.
Yes, 401k matching contribution plans cost money, but the reality is that companies can’t afford to not offer employees a 401k matching contribution. Besides attracting and keeping talent, matching plans have proven to be a bottom line benefit for businesses.
Exhibit “A” is a recent study from Prudential that concludes every year an employee delays retirement savings costs employers $50,000 per employee.
As company matching programs have proven to incentivize staffers to participate in a 401k plan, that companies that sponsor those plans and offer an employee match usually do better financially.
Understand 401k Safe Harbor matching contributions.
Safe Harbor 401k plans are popular with companies that seek to bypass regulatory non-discrimination testing mandated by the U.S. Internal Revenue Service. With safe harbor 401k plans, companies are obligated to offer 401k matching contributions to employees.
There are two 401k matching contribution models under safe harbor 401k plans.
— A basic 401k plan contribution match. Here, a company match amounts to 100% on the initial 3% a staffer defers into his or her 401k plan. Additionally, the company offers a 50% matching contribution on employee contributions of between 3% and 5% (for a matching contribution total amount of 4% by the company.)
— An accelerated match. In this scenario, companies match employee contributions at each 401k contribution tier. For instance, a company might offer a 100% 401k matching contribution for an employee’s first 4% of annual compensation.
Under the safe harbor rules, a company can also offer a 3% 401k plan contribution (or more) against an employee’s total annual compensation, whether or not the employee contributes any dollar amount to a 401k plan.
Getting to know all you can about safe harbor 401k’s will likely improve your employee’s retirement planning experience and maximize their 401k plan savings.
The Takeaway on 401k Plan Matching Contributions
The 401k matching contribution “need to know” items listed above aren’t the only factors to be accounted for when rolling out a 401k matching program, but they are at the top of the list.
For more information on 401k plan matching contributions (i.e., how to set one up, understanding regulatory requirements, using vesting schedules, and evaluating plan formulas, among other issues), talk to a Wellington Retirement Solutions representative today.
Are you ready to get started?
Fill out the form, or give us a call at 1-888-934-4015 ext 1. We’ll send you a proposal on all of the services we offer and how low it can actually cost to run your 401k plan with us.