401(k) Employer Match Contributions Matter

It’s a common question among employers who decide to offer an employer match with their 401(k)—or are considering adding a match—to wonder how much they should be contributing to employee accounts. There isn't one right answer, but by looking at industry averages and thinking about how you'd like to structure your match, you can develop an employer match strategy that helps accomplish the goals of both your business and your employees.

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How Does a 401(k) Match Work?

When a business offers a 401(k) employer match, it means that the employer will match a percentage of their employees’ 401(k) contributions, usually up to a certain percentage of their salary. A typical 401(k) employer match might be between 3% and 6% of an employee’s salary, in which case the employee would receive a contribution of 6% of their salary from their employer after contributing 6% themselves.

There are also variations that can give the employer more flexibility in how they contribute to employee accounts. When thinking about an overall employer match rate, one major factor to consider is how your match style fits with your business goals.

There are three primary ways to implement a 401(k) employer match: 

•    Dollar-for-dollar match: An employer will match employee contributions dollar-for-dollar up to a certain percentage of the employee’s total compensation. This has recently become the most common employer match arrangement.1

•    Stretch match: In a “stretch” contribution setup, the employer matches 50% of employee contributions up to a certain percentage of the employee’s total compensation. For example, an employer might do a 50% match up to 8% of an employee’s compensation, for a total maximum contribution of 4% of the employee’s salary.

•    Dollar amount match: In this arrangement, an employer will determine a set dollar amount to contribute to each employee.

Determining which option to use for your employer contribution will inform how your match works, and what total amount your employees will need to contribute in order to receive their full match from you.

Benefits of a 401(k) Employer Match

From the employee’s point of view, an employer match can result in significantly more compensation per year. Since that compensation is given to the employees on a pre-tax basis (with taxes taken out only when the funds are withdrawn in retirement), every dollar an employer contributes can be invested and compound over the years, resulting in greater retirement savings. Additionally, an employer match could be the incentive an employee needs to contribute to their retirement plan.

For employers, there is a strong tax benefit. Since 401(k) match dollars are seen as compensation, they will lower an employer’s taxable income for the year, also reducing their tax liability. Also, when it comes to securing talent, 401(k) match can help employers stand out against the competition. Especially in cases where a potential hire is considering more than one offer, employer match could be what tips the scales in one direction over the other.

According to Fisher Investments 401(k) Solutions enrollment data, participation and deferral rates are often impacted differently depending on the type of match an employer will choose to use. Plans with no employer contributions score the lowest on both fronts, with average participation rates approximately 10% to 15% lower than those with a match. The greater impact was on deferral rate, where employers saw a nearly 50% increase in the amount of money their employees were contributing when any kind of match was offered.2

Ultimately, you can speak to a 401(k) service provider to discuss your options when it comes to offering an employer match. Your provider should be able to help you define your goals for your match, as well as your financial constraints, in order to reach a match style that will offer a stronger benefit to your employees while also staying within your budget.

Additional Business Considerations

•    For highly-compensated employees (HCEs), which for 2019 is defined as an employee earning more than $125,000, employer contributions may be limited.

•    The business owner can set a “vesting schedule” for their employees to receive their matching contributions, which means the business can decide if their matching contributions are given to the employee right away, or if it’s earned after working for a specific amount of time.

•    Employer contributions to employee 401(k) accounts are considered a business expense, and can help lower your business’s tax bill.

From the Employee’s Perspective

•    Employees should be aware of their contribution limits as they pertain to an employer match, as well as whether a vesting schedule exists. These two things can help an employee maximize the matching contributions they receive from their employer.

•    Employees should also be aware of how those matching contributions may be forfeited—if their employment ends, for instance, either voluntarily or involuntarily. Contributions made by the employee are always 100% vested at all times and cannot be forfeited.

•    Some employer matches come in the form of company stock. However, having a diverse portfolio and wide array of investments is considered a wise decision, and is practiced by many financial experts. Some experts recommend keeping no more than 5% to 10% of total assets in company stock.

What is the Average 401(k) Match?

In 2016, the average employer 401(k) match contribution was 4.7% of salary, up from 3.9% in 2015.3 That number was also up from a year prior, when a 2015 analysis by the U.S. Bureau of Labor Statistics found the average 401(k) match rate to be 3.5% of salary (and a slightly-lower 3.2% for plans that utilize autoenrollment).4

One possible reason for this could be competition for talent. This is especially evident in industries or markets where labor competition is fierce; Microsoft, as an extreme example from the world of enterprise companies, committed in 2016 to matching half of employee contributions up to federal limits as a way to retain their top employees and attract new talent away from the competition.5

Regardless of how you decide to structure employer contributions, a match can often act as a catalyst to greater engagement in the plan. Nearly all of the small and mid-sized businesses (97.1%) we serve that offer a match have seen employee contribution rates that are higher than the maximum match percentage offered—by an average rate of 5.51%.6 Consider that the average contribution rate by American workers is 6% in total, and it’s clear that not only are employees saving more when a match is offered, but they’re doing so by larger margins.7

Help Your Employees Save for Retirement

For employers who can choose to offer an employer match, one place to look for inspiration about setting a match rate is the data. More than any other financial benefit, employees want 401(k) matching from their employers, with 72.5% preferring employer match over other benefits.8 There’s also a strong correlation between employees who say they are satisfied with their defined contribution plan (a type of retirement plan in which a company contributes money at a certain rate each year as a benefit to employees, like a 401(k) with employer match) and those who intend to stay with their current employer.9 Match rates play a significant role in determining overall employee satisfaction with a retirement plan, which only underscores the importance of offering competitive match rates for employers looking to compete for talent.

The Ideal 401(k) Match

It’s a common misconception among employees that they should only save money into their 401(k) accounts up to the match rate set by their employer. If, for example, you choose to follow a dollar-for-dollar 6% match, some employees might interpret that to be the mark they should aim for when it comes to determining how much they save.

According to some industry experts however, employees should be saving even more than that if they are to be ready for retirement—5% early in their careers, 10% later on, and 15% as they approach retirement. This is leading some of those experts—like the author of a National Bureau of Economic Research study—to suggest that a 50% match up to the first 12% of an employee’s salary is a more ideal setup, as it motivates employees to save more and reach that 15% target without actually costing the employer anything more than a dollar-for-dollar 6% match. Between this sort of employer match setup and plenty of educational resources and support from your 401(k) service provider, employees will have a great starting point to understand, save for, and reach their retirement goals.

As you continue to think about the right contribution rate for your 401(k) employer match, remember that your contributions are first and foremost a benefit to your valued employees. Balance the industry averages and data with your goals for both your employees and your business, and you’ll find a contribution rate that’s right for your employees’ needs—and yours.



1 https://www.shrm.org/ResourcesAndTools/hr-topics/benefits/Pages/bigger-401k-matches.aspx

2 Fisher Investments 401(k) Solutions plan demographic data, as of 7/31/2017

3 https://www.wsj.com/articles/u-s-companies-have-a-new-401-k-fix-spend-more-1500283804?mod=trending_now_2

4 https://www.bls.gov/opub/mlr/2015/article/automatic-enrollment-employer-match-rates-and-employee-compensation-in-401k-plans-7.htm

5 https://www.wsj.com/articles/u-s-companies-have-a-new-401-k-fix-spend-more-1500283804?mod=trending_now_2

6 Fisher Investments 401(k) Solutions Enrollment Data as of 12/14/17.

7 https://www.fool.com/retirement/2017/01/15/average-americans-401k-contributions-by-age-and-in.aspx

8 https://www.limeade.com/content/uploads/2016/12/Workplace-Well-Being_FINAL.pdf

9 https://www.towerswatson.com/en-US/Insights/Newsletters/Americas/insider/2005/how-do-retirement-plans-affect-employee-behavior

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