Employer 401(k) contributions are well worth the investment
Company match contributions are beneficial for retirement
plan participants, but they can also provide advantages for sponsors, including
attracting and retaining employees. A white paper from Arnerich Massena,
“Making the Most of Your Match,” outlines how a match affects participation,
contribution rates, employee satisfaction and retirement outcomes. It also
explains the key elements to consider when structuring an employer matching
program, including safe harbors, automatic enrollment and provision for compensation
in a deferred form for maximum tax advantage.
Jacob O’Shaughnessy, CFA, investment adviser for the
institutional practice at Arnerich Massena, says that for most plan sponsors,
the main objective in offering an employer match contribution is to provide
better outcomes for employees. However, matches can have additional benefits,
such as employee attraction and retention, and can align the interests of the
firm with the mechanics of the match.
Designing the best match not only includes considerations of
the best formula but also the vesting schedule and cost to the sponsor. An
example of managing costs is when a plan sponsor wants to increase employee
deferrals; instead of matching 100% of the first 3% of salary deferred, it
would match 50% of the first 6% deferred. The money contributed will not change
for the plan sponsor, but the match design will result in new participant
outcomes, O’Shaughnessy notes.
In another example, he says that if a plan sponsor wants to
increase participation, it should offer a generous match and immediate vesting.