Report: Don't Look to Match for Earth Shattering Participation Boosts

January 13, 2005 ( - While a 401(k) company match does impact plan participation rates, that impact is more on the unremarkable side, according to a new study.

The Vanguard Group’s Center for Retirement Research found after reviewing more than 500 retirement plans that participation rates rose by 5% to 15%, depending on the design of the match – a rate hike researchers called “meaningful though modest.” Some 82% of the plans studied offered a match.

With company match programs ranging from 0.5% to more than 6% of pay – and the typical match being about 3% – about six in 10 of non highly compensated employees (NHCE) would join the plan regardless of the match level, the report said. Some 10% will sign on to the plan because of the match, while almost three in 10 sit on the sidelines regardless of the match. The researchers point out that match details generally don’t affect highly compensated employees (HCEs) as they would join and contribute regardless of their plan’s match level.

“Sponsors have a meaningful but limited ability to influence the savings behavior of NHCEs through the match design,” the report said. “To broaden retirement savings, they should consider other plan design strategies such as non-elective contributions or autopilot 401(k) designs.”

The Vanguard researchers also found that the availability of K plan loans and the size of the plan’s investment lineup likewise have an impact. Loans can bump up contribution rates by 10%, or 6.1% to 6.7% on average. The number of investment options can raise participation but having more equity offerings than other funds can actually dampen it. Eighty-five percent of plans featured loans while the average number of investment options was 12.8.

64% Participation in a Matchless Plan

Taking a more detailed look at the effects of the match on participation, Vanguard said the impact is not widespread. For example, in a plan with no match, researchers estimated that 64% of NHCEs would be in the plan. “We believe these eligible employees are responding to the retirement savings and tax benefits of the plan, as well as the plan’s education program, independent of any employer match,” the report asserted.

The report estimated that a plan with a $0.50 on the dollar to 6% match would result in a 73.5% participation (76.2% with HCEs) while a plan with a $1 match per dollar to 6% would produce a 78.4% rate (80.6% with HCEs).

Researchers point out that, ironically, match rates can actually slightly drive down deferral rates with a matchless plan forecast to have a NHCE rate of 6.1% while the deferral at a plan with a $1 per dollar to 6% would be 5.7% plus 0.6% if the plan offers loans. A $0.50 per dollar match to 6% produces a 5.9% deferral plus 0.6% for loans. “It is as if NHCEs think in terms of target savings rates: If the match is more generous, the participant saves somewhat less,” the report indicated.

In terms of the size of a plan’s lineup, Vanguard found that increasing equity funds from 65% to 75% of those available produces a 1.5% participation rate loss while adding two funds can bump participation by 2.3% (See Report: Too Many Fund Choices Can Drive Away Participants ).

Other Options

With a modest impact from a company match on NHCE behavior, Vanguard asserted that plan sponsors can still consider nonselective contributions (profit sharing or money purchase contribution) as a way to help employees boost retirement savings. “By making such contributions, the employer is supplanting the employee’s judgment with the employer’s own judgment and ensuring some minimum savings for retirement regardless of the employee’s own decision regarding elective deferrals,” researchers commented.

The report also recommended consideration of the increasingly popular automatic plan features such as auto enrollment and auto deferral increases. “These programs raise plan participation and savings rates by fundamentally changing default selections in favor of plan savings,” the report said.

The research is based on 2001 data from more than 500 plans for which Vanguard provides recordkeeping services.

The full report is here .