Approaches to the Employer Match

The employer match has been found to be effective in recruiting and retaining employees, as well as encouraging them to participate in a retirement plan. A recent blog entry looks  at different approaches an employer can take in matching participant deferrals. 

Jim Quaid, Chair of the Not-for-Profit Group for consulting firm ORBA, calls matching contributions “a valuable benefit” for employees and a way to encourage participants “to play a meaningful role in preparing for their own retirements.” In the process of providing that, he argues, the trick is to do so “in a way that is affordable for both you and your employees.”

Quaid examines three approaches to providing the match. 

Graded Matching

Quaid says that when an employer uses graded matching, the match might be dollar-for-dollar up to a certain percentage-of-income threshold, with an additional match up to another threshold.

Fixed Matching 

How effective a fixed match is at encouraging participation in a plan depends on how it is structured, Quaid suggests. He reports that overall it remains more widespread than a graded matching approach, and cites statistics from the Plan Sponsor Council of America (PSCA) showing that in its 63rd Annual Survey of Profit Sharing and 401(k) Plans, it found that 51% of 401(k) plans with fewer than 50 participants use fixed matching. He also says that its popularity among larger plans is “holding steady.” 

But Quaid also notes that the PSCA found that the fixed matching approach is dropping in popularity—it may be at 51% now, but it had been at 73% just two years before. And he also asserts that smaller plan sponsors are less likely to follow such an approach now. 

Stretch Matching 

A stretch match approach seeks to encourage a higher contribution by providing a match of a certain amount up to a higher deferral level, Quaid suggests; for instance, an employer providing a 50% match up on up to 8% of deferrals, instead of matching an employee’s deferral dollar for dollar on the first 4%. 

Quaid adds that a Vanguard study found that higher match values were more effective than higher match thresholds in encouraging employee participation and higher employee contributions.