Stretching the match, which is relatively new and barely used by employers sponsoring a defined contribution (DC) plan like a 401k or 403b, is a key element of the Ideal Plan. After a program held at the University of New Mexico, TPSU Adjunct Lecturer Curtiss LaCross discusses how he used a stretch match to not only increase deferrals but as a way to engage employees.
Let’s review: If a plan, for example, offers a match of 50% of the first 6%, a stretch match might offer 25% of the first 12% which comes out to the same percentage but forces participants to defer more to get the full benefit. Research and common sense shows that people tend to defer at or close to the match or, at least, most people are unlikely to defer more. It’s also important to spell out what the actual dollar amount is rather than percentages which most people do not understand.
Objections or concerns voiced at many TPSU programs by plan sponsors include:
- People who cannot afford to defer up to the full amount will miss out.
- Those that are deferring up to the match will lose some benefit.
- Highly compensated workers may not be able to defer to the match.
But Curtiss found very few if any objections from employees at one plan where he was able to change the match from 100% of 3% to 50% of 6%. The employer might have thought there were doing their employees a favor with the 100% match but it created relatively low deferral rates. Not only was Curtiss able to get most workers in the plan up to 6% but some even went to 10% after he was able to speak with them one on one about the importance of saving enough for retirement.
HR and finance people can be reluctant to make changes even when it does not cost the company money for fear of any negative feedback. But the stretch match engenders good behavior for the vast majority which is worth a few people grumbling. The goal of a DC plan is to get as many people to retire on time to keep the company vibrant through healthcare costs and salaries that are competitive. A stretch match is an easy, no cost and effective step in that direction.
