401k Employer Match Changes Participant Behavior
401k employer match can be used to increase participant savings. But, are you aware that the 401k employer match can be strategically designed to raise the amount that a participant saves, without the employer increasing their own matching deferrals? Recently Michael Stuber, Director of Operations at Primark Benefits and Board Member of the National Institute of Pension Administrators (NIPA) spoke with Fred Barstein, Founder and CEO of 401kTV to discuss how plan sponsors can maximize the benefit of the 401k employer match. They cover the concepts of Stretching the Match, Targeting the Match and using the 401k employer match to increase deferral levels.
Full Transcript Here
This is Fred Barstein with 401kTV and this is the NIPA 401kTV newsletter. I am here with Michael Stuber from the board of NIPA. Welcome, Michael.
Okay if we ask you a few questions?
Oh yes, please.
So Michael is the Director of Operations and Marketing for Primark Benefits. Which is in the San Francisco Bay area, and they have about 600 clients. A mix of 401k, 403(b), and defined benefit and rumor has it that you have a few clients in Silicone Valley.
A couple, yes.
A couple out there on that, so great. So today Michael, we wanted to talk about optimizing the match. A lot of companies have it, probably in your area, a lot of companies have the match, but companies don’t always use it as effectively. So what’s the first thing that you have to think about when you’re thinking about optimizing the match?
Well, a match is going to be money that the company is going to be giving to the employees, through the pension plan and what you’re looking to do is reward behavior. So what you really want to do is use the match to increase deferral levels. What you want to make sure that it’s effective, you can give too much of a match, sometimes that just doesn’t help. Especially, if you’re on a budget, you want to make sure that you can stretch the match out and you also want to be able to target the lower paid individuals to incent them to do more deferrals.
So the point is, before you do a match, find out what is the purpose of that match? And make sure that match is meeting the purpose. So give us a couple of examples of effective matches.
One effective match is to target this at the lower paid, by doing an annual cap. Now an annual cap is very easy to understand, if for example if you said, “We’re going to do a match of .25 on the dollar, up to a maximum per head of a thousand dollars.” What you’re doing then, is you’re incenting employees to put in $4,000 per year.
The reason that’s effective is that $4,000 for a lower paid person, for example, somebody who makes $40,000, that actually incents them to put in $4,000, which is 10% of their pay. Where somebody who’s making a $100,000, to put in $4,000, that’s 4% of their pay. And people who are making $100,000 or more, they’re already incented to participate. So it’s almost a waste to give a really big match to highly paid people.
It could be 1,500 or 2,000. It’s just as an example, so we’re not advocating a 1,000 per se. The other thing you talked about is communication. What are an effective companies that you’re seeing effective communication?
It’s very important to make sure that the match is highlighted in all of the materials that are going to the employees. And sometimes rather than focusing on percentages, give some real dollar examples. And if I just go back to the formula I was using, if you put in $500, we’ll put in a 125. If you put in a $1,000, we’ll put 250. If you put in $4,000, we will put in $1,000.
Right. To put it in dollar amounts. We had a company that actually at the end of the year, did a calculation and said, “Here’s how much money you left on the table by not maximizing it.”
Exactly. And then by having a very fixed dollar amount, people know what exactly what their target is.
Right. So you’re a big advocate of stretching it, but doing a fixed target amount, so people can understand.
Exactly. Understand, communicate, let people know ahead of the time. Even at the end of the year, the company might even put out a report saying, “We put out a match of,” lets the match was a total of $50,000. Let people know what you did, even if they didn’t participate, it’s going to have an impact on those people who may be left out to participate. Next year they might participate.
Very good. Thanks for your time today.
All right. You’re welcome.
And thanks for your support 401kTV. We love talking to TPA’s, they have great knowledge and it’s great interest to our audience. So, thanks again. And thank you for watching 401kTV and the NIPA 401kTV monthly.