401(k) Matching Contributions May Be Cut, New Research Suggests
401(k) Matching Contributions May Be Cut, New Research Suggests
If the employer matching contribution in your 401(k) plan is dollar-for-dollar on the first 3% of your pay, then prepare for a cut. As more companies adopt “automatic enrollment” for 401(k) plans, new research has given them ammunition for cutting the 100% match.
That research, from Harvard and Yale, finds that, when automatic enrollment is in place, cutting the match creates only a “modest” drop-out rate — roughly 5 to 11 percent. This will give employers an incentive to cut this benefit cost.
Matching is a bit tricky. Mathematically, a dollar-for-dollar match on the first 3% of pay is the same as a 50-cent on the dollar match on the first 6%. But the 50-cent match will cost the employer less because not every employee will defer up to 6%. The dollar-for-dollar match on the first 3% of pay benefits most everyone, especially the lower-paid who would have a harder time deferring more than 3%.
The new automatic enrollment safe harbor regulations also give employers a justification for cutting that dollar-for-dollar match. So if you’ve been getting a 100% match on your 401(k) contribution, up to 3% of your pay, then start telling your HR department how important it is to you.
Although the researchers call a 5 to 11 percent drop in enrollment “modest,” it will hurt those least able to save for retirement. Lower-paid employees make a bigger personal sacrifice to contribute to the plan and may get a lesser benefit if the match is changed from 100% of the first 3% to 50% of the first 6%.
It would also hurt young employees who are just beginning to invest. By reducing their early contributions, a cut in the match will force them to save more and/or work longer because starting early is the best way to accumulate retirement savings.
Ironically, the conclusion the researchers draw is that a company could make a “non-contingent” contribution – give the contribution to all eligible employees, no employee contribution required, instead of a match. This would benefit the lower paid employees. It would also be the same “profit-sharing” approach that many employers abandoned in favor of 401(k).
But why must this decision be cast as an either-or? Either the higher-paid benefit with the matching contribution or the lower-paid benefit with the “non-contingent” contribution. Must a company hurt one group to benefit another? Perhaps that approach simply reflects our divisive, winner-take-all society.
Andy Mayo helps beginner investors — or anyone frustrated, uncertain, or confused about stock market investing — make money consistently by using your personal Essential Pivot. He blogs at Extramayo.net