Why the Match Matters – to Employers

It has been heartening in recent weeks to see a number of employers announce plans to expand and increase benefit programs, offer bonuses, and increase the employer match. Better still, a recent survey indicates that more positive changes could lie ahead.

A decade ago, the headlines were filled with stories about a number of large firms announcing that they were cutting, and in some cases eliminating altogether, the employer match. While the vast majority of employers didn’t reduce those matches, it was nonetheless a stark reminder that those defined contributions are “defined” annually, not in perpetuity.

The Match Matters

There are a number of things that we know about the importance of the employer match; there’s the obvious (though sometimes glossed over) impact that an employer contribution means in terms of retirement security in simple dollars, for one thing. Indeed, the nonpartisan Employee Benefit Research Institute (EBRI) has estimated that if future employer contributions were eliminated for Gen Xers, their retirement readiness rating would decline from 57.7% to 54.6% – and that doesn’t consider what might happen to employee contributions as a result.

And then there’s the reality that those who it save in a retirement plan at work appear to save at/near the level matched (though the amount of the match matters less than the existence of the match), suggesting that it provides a savings target of sorts for workers.

There’s little question that the match does good things for workers and their retirement security – but, let’s be honest, the employer match that is “free” for workplace savers is anything but for the employers that provide it. Here’s why it’s worth the money.

Better Finances Mean Better Work

A 2017 Mercer study found that on average, people spend about 13 hours per month worrying about money matters at work – about 5 hours at the median, suggesting that some spend a lot more time than others thinking about such things.

EBRI’s Retirement Confidence Survey suggests that retirement confidence — and the retirement savings that ostensibly underpin that confidence – are at least somewhat connected. There’s a growing body of research that suggests that financial concerns take a toll on productivity. That’s not just retirement, of course – but it’s a big part of it.

Little wonder that more than 8 out of 10 (82%) finance executives surveyed by CFO Research with Prudential Financial, Inc., believe that their companies benefit from having workforces that are financially secure – and nearly as many believe that employers should assist employees in achieving financial wellness during their working years.

Better Benefits Attract Better Workers

Okay, every time somebody talks about the reasons to offer a retirement plan, “attract and retain qualified workers” is on, if not at the top of, that list. Thinking about that next generation of workers? Well, the 2018 Millennial Benefit Trends Report from Pentegra found that, asked if they take into account whether a job offers benefits when considering applying – well, pretty much everyone (96.77%) said yes. And, asked to rate five general benefits categories in order of importance, “401(k) Retirement Savings” easily outpaced the others, with about 4 in 10 rating it “extremely important.”

The CFO Research survey noted above also found that nearly two-thirds (63%) say that employee satisfaction with benefits is important for their company’s success, and 65% believe that employee benefits are critical to attracting and retaining employees.

Better Benefits Keep Workers

By far, the finance executives surveyed consider higher employee satisfaction (59%) and increased retention (53%) as the most important benefits of a focus on financial wellness.

State Street Global Advisors’ 2016 research suggests that there is a noteworthy interplay between people’s happiness with their working life and their financial well-being. In fact, reports indicate that financial wellness actually influences an employee’s happiness at work.

Poor Savings Postpones Retirements

A report by Prudential (aptly titled “Why Employers Should Care About the Cost of Delayed
Retirements”) found that a one-year increase in average retirement age results in an incremental cost (the difference between the retiring employee and a newly hired employee) of over $50,000 for an individual whose retirement is delayed.

Moreover, the report notes that it results in an incremental annual workforce cost of about 1.0%-1.5% for an entire workforce. This represents the incremental annual cost of a one-year delay in retirement averaged over a five-year period. Prudential notes that for an employer with 3,000 employees and workforce costs of $200 million, a one-year delay in retirement age may cost the employer about $2-3 million.

It’s been great to see so many employers announce enhancements to their benefits programs, cash bonuses and – most particularly – increases to their 401(k) matches. However, every year tens of thousands of employers commit to helping their workers save for retirement by committing to making a company match – and they have done so in good times and times that weren’t so good.

It’s a commitment that makes a huge difference – and one that shouldn’t be taken for granted.

- Nevin E. Adams, JD

Are You Exploiting Naïve Myopic Workers With That Employer Match?

Over the years, I’ve seen some convoluted ways to rationalize undermining the tax preferences of workplace retirement plans and substituting government tax credits — but a new one just may take the cake.

“A Behavioral Contract Theory Perspective on Retirement Savings,” authored by Ryan Bubb and Patrick Corrigan from the New York University School of Law and Patrick L. Warren from Clemson University’s John E. Walker Department of Economics, starts off by assuming that workers are rational, though perhaps not rational in the way you or I might consider to be rational. However, I’ll accept as logical their assertion that rational workers will prefer saving through an employer-provided plan, rather than accepting a job that does not provide such a plan.

They also claim to provide an analysis that “provides novel explanations for the use of low default contribution rates in automatic enrollment plans, the shift away from defined benefit annuities toward lump sum distributions in defined contribution plans, and the offering of investment options with excessive fees.” Well, it’s certainly novel. More on that in a minute.

Exploit ‘Actions’

The authors claim that employers that provide qualified retirement plans provide more after-tax compensation (in the form of employer contributions not subject to FICA) to employees than employers that do not, and that if workers are rational (there’s that “rational” reference again), then competition for workers in the labor market should therefore provide incentives for employers to offer such plans. So, all other things being equal, workers would prefer to work for an employer that offers a plan than one that doesn’t. So far, so good.

Now we all know that some workers don’t save, and some don’t save enough. But the paper maintains that “if workers undersave (or make other retirement savings mistakes) due to behavioral biases,” then the labor market will give employers incentives to design plans that “cater to and exploit, rather than resolve, those behavioral biases.”

They claim that some workers undersave due to myopia — and that also results in employer plan designs that “exploit the myopic,” and that they do so specifically by — wait for it — offering matching contributions, which the study’s authors claim “naïve myopic workers overvalue.”

Moreover, they claim that this matching results in what they term “cross-subsidization” of rational workers, which, in turn, lowers myopic workers’ total compensation. Said another way, matching contributions mean that the naïve, myopic part of the workforce is not only undersaving (because they overvalue the contributions), but actually receiving less compensation (since the employer is paying them less to offset the cost of the contributions). Are you following this?

And while you may be under the impression that employers offer matching contributions either to increase NHCEs’ contribution rates or to meet one of the safe harbors so that they can provide greater tax-advantaged compensation to HCEs, according to the researchers, you would be wrong. They claim that employers offer those matches precisely because myopic workers overvalue them. Sound like a devious plot to you? Now you’re getting it…

Not only that, they also claim that matching contributions crowd out what they consider to be the superior — and non-redistributive — “commitment device” of non-elective contributions. That’s right, contributions that do not require any particular action on the part of the worker other than to exist and be eligible. Apparently it’s the reward for specific behaviors that is distorting things.

‘Over’ Matched?

Indeed, these researchers believe that the mere existence of the match means that workers will overestimate how much they will, in fact, save for retirement — and, since they think they will accumulate more than they actually will, they will save less — and employers save money, not only because they pay less (the offset for the matching contributions), the workers will choose to save less — and get less of a match.

Put simply, the paper claims that the labor market gives employers incentives to craft plan designs that cater to what biased workers perceive to be of value, and that the same behavioral biases that produce worker mistakes in saving for retirement will also typically lead workers to prefer plans that fail to correct their mistakes (apparently by encouraging them to save for retirement, but not as much as they need) and that can even exacerbate them. The result, they say, is an equilibrium set of choice architectures (plan design) that fails to effectively address the basic retirement savings policy problem of people not saving enough for retirement. Choice architecture that, in their estimation, is making things worse, not better. Because employers offer workplace retirement plans — and have the temerity to match the contributions of workers who take advantage of these programs. The horror!

Employer ‘Incentives’

The authors’ main message is that when workers undersave due to those behavioral biases, then “employers have incentives to design employer contributions in a way that fails to address the undersaving problem and indeed that can even actively exploit the undersavers.”

They not only claim that matching contributions are harmful to rational workers, but maintain that they are “unambiguously so.” How? Well, they claim that matching contributions distort the worker’s incentive to save by encouraging too much savings (which is apparently different than enough savings), and the worker would receive more “utility” from being paid this money as wages.

Oh, and as another example of employer bad behavior in plan design (and ostensibly another reason employers can’t be relied upon in this role), the authors note that most employers choose an automatic enrollment default deferral rate of 3%. The authors concede that the use of automatic enrollment can result in retirement savings by employees who would otherwise have initially contributed nothing to the plan. However, they caveat this admission by noting that some who would have saved more than that default rate if they had had to fill out an enrollment form only save at the default rate.

The solution for this? Substituting for the current system of employer-provided pension plans a new federal defined contribution plan, designed by a federal agency and not linked to any particular job, of course. Oh, and not only do they claim that this could improve savings outcomes, but that it would do so “at little to no fiscal cost to the government.”

Except, presumably, for the part where the government trades the temporary deferral of tax revenues for the permanent forgiveness of a government tax subsidy.

FWIW, I find it hard to believe that this kind of analysis would survive serious scrutiny outside of the rarefied air of academia. But stranger notions have.

- Nevin E. Adams, JD

6 Things 401(k) Participants Need to Know

Our industry spends a lot of time and money educating workers about the advantages and mechanics of saving for retirement.

But here are six things I think too often go unsaid.

Your 401(k) isn’t free.

That’s right, it isn’t free. It may be heavily subsidized by your employer, and you’re likely paying a lot less for the fund(s) and features you have access to than if you were to try and buy them on your own (say, via an IRA or brokerage account) — but even then, it’s probably not “free,” nor should you expect it to be. But if you don’t know how much you are paying, you should find out.

You’ve probably been provided some information about your 401(k) plan fees already. You can find out how to use that information here. More information about 401(k) fees is available here.   

That employer match isn’t “free” either.

You may have heard that you should save enough to receive the full employer match — that “you don’t want to leave that free money on the table.” It is, of course “free” money to you when you save in your workplace retirement plan. But not every employer provides a matching contribution, and it’s a real out-of-pocket cost for those that do. Remember that, if you’re lucky enough to have an employer who makes a matching contribution — and thank them.

Saving to the level of the match is probably not enough.

As noted above, many employers choose to encourage your decision to save for retirement by providing the financial incentive of an employer matching contribution. While there are a number of factors that go into determining the amount and level of the match, how much you need to set aside for your own personal retirement goals is almost certainly not one of those factors.

You certainly don’t want to leave any of that match on the table by not contributing to at least that level. But if that’s where you stop saving, you’re probably going to come up short.

How much you save is more important than how you invest what you save.

There are bad investments that can cost you money, and good investments that can help your account grow faster. But what really matters in achieving financial security for retirement is how much you save (including the amount of the employer match, if any).

For more information, see “Missing the Forest for the Trees” here.  

If you’ve never tried to figure out how much you’ll need to live in retirement, you may not live very comfortably in retirement.

Surveys routinely show that most Americans have not even tried to guess how much money they will need to live on in retirement, much less actually made an educated guess. Sure, it sounds complicated, and sure, things can change over time — and yes, you’re busy. But saving for retirement with no idea of how much you might need is a bit like going on a long trip in a car you don’t know with a gas gauge that isn’t working.

Chances are, your 401(k) plan has some resources that will help you do the calculation. If not, or if you’d like a “second opinion,” try the free Ballpark E$timate at choosetosave.org. 

If you don’t know what you’re doing, get help.

And not the kind you might get from Joe in the lunchroom, Sally in accounting or “experts” you’ve never met. If there’s a professional advisor working with your 401(k) plan, that’s a great place to start.

- Nevin E. Adams, JD