The formula employers use for their matching contributions in their 401(k) plans serves as a strong cue to workers for how much to contribute, analysis by The Principal finds.
When employers promise to match 100% up to 2% of an employee’s contribution, the employee invests an average of 5.3%. When employers promise 50% up to 4% of pay, employees’ average contributions rise slightly to 5.6%. And when employers offer a match formula of 25% of up to 8% of pay, the average participant contribution jumps to 7%. In each case, however, the employer is investing no more than 2% of a worker’s salary.
Thus, The Principal said, the design of the employer match can be a powerful motivator in boosting the amount of money participants put into their 401(k) retirement account.
“The data tells us that while the employer contribution stays at 2%, the higher target deferral in the match formula is spurring investors to save more,” said Barrie Christman, vice president of individual investor services at The Principal. “This is significant because it shows that employers can incent better savings behavior without having to increase their costs.”
Christman added: “This statistic clearly illustrates how powerful the match can be in promoting better savings ibehavior. Employees don’t want to ‘leave money on the table.’”