Matching a greater percentage of employees’ retirement contributions is a great way to get them to save more – and boost participation rates, right? Guess again.
That can actually lead to employees socking less money away, a new study by Principal Financial Group has found.
The study found that offering a 100% match on employee 401(k) contributions can actually reduce the amount of money workers save.
So what’s the optimal way to structure your plan to achieve maximum employee savings?
Consider Principal’s analysis: It looked at plans that all had the same maximum employer contribution (2% of an employee’s salary) and studied employees’ behaviors in plans that used three different formulas to reach that match rate.
Here’s what they found:
- When employers matched 100% of contributions up to 2% of employees’ salaries, the average participant contribution was 5.3%
- When employers matched 50% of contributions up to 4% of employees’ salaries, the average participant contribution was 5.6%, and
- When employers matched 25% of contributions up to 8% of employees’ salaries, the average participant contribution rose to 7%.
In each scenario, no employer wound up contributing more money than another.
Takeaway: Consider offering a smaller match, but allow that match to be given on a higher percentage of employees’ salaries. It’s a win-win — employers don’t have to spend more, and many workers will increase their savings to earn the full match.