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Stretching the Match May Not Result in Higher Contribution Rates

Practice Management

One strategy that’s often recommended to increase plan contributions in plans without automatic enrollment is to “stretch the match,” but a recent study suggests that may not achieve the desired results.

When plan sponsors stretch the match, they apply an existing dollar match to a higher contribution rate. For example, instead of matching 100% on the first 4% of pay, they match 50% on the first 8% of pay.

The idea is that the higher match threshold will encourage participants to contribute more to the plan. Counterintuitively, however, stretching the match does not seem to lead to higher plan contribution rates, Vanguard explains in its “How America Saves 2019” report. 

In fact, Vanguard’s research finds that higher match thresholds are typically associated with lower plan participation and lower employee contribution rates. The report points to earlier research that analyzed a group of plans with match formulas that mimic or simulate this strategy. It shows that contribution rates decline by 25% to 50% when the match is stretched. By contrast, it notes that 100%-match plans had participation rates 20% to more than two times higher than plans that stretch the same match value to a higher threshold.

Overall, nearly two-thirds of participants received the full employer-matching contribution in 2018. Somewhat surprisingly, participants in voluntary enrollment designs were more likely to receive the full employer match than participants subjected to automatic enrollment. Vanguard notes, however, that after three years of automatic annual increases, participants subjected to automatic enrollment are more likely to receive the full employer match. The report shows that after three years of annual increases, three-quarters of all participants will be receiving the full employer match.

Benchmarking Formulas

Overall, the wide variation in employer contributions is most evident in the design of employer-match formulas, Vanguard observes.

In 2018, the firm administered more than 150 distinct matching formulas for plan offering an employer match. Among plans offering a matching contribution in 2018, 7 in 10 (covering two-thirds of participants) provided a single-tier match formula, such as $0.50 on the dollar on the first 6% of pay.

Less common – used by 21% of plans covering 27% of participants – were multi-tier matching formulas, such as dollar per dollar on the first 3% of pay and $0.50 per dollar on the next 2% of pay. Another 6% of plans, covering 7% of participants, had a single- or multi-tier formula but imposed a maximum dollar cap on the employer contribution, such as $2,000. Finally, the report shows that a small percentage of plans used a match formula that varied by age, tenure or other variables.

The matching formula most commonly cited as a typical employer match is $0.50 on the dollar on the first 6% of pay. This is the match most commonly offered among Vanguard DC plans and most commonly received by Vanguard DC plan participants.

Among plans offering a match, the report notes that nearly one in five provided exactly this match formula in 2018, covering 13% of participants. The second most common matching formula, reflecting a common safe harbor design, was $1 on the dollar on the first 3% of pay and $0.50 on the dollar on the next 2% of pay. This match was used by 1 in 10 plans in 2018, covering 14% of participants.

The promised value of the match varies substantially from plan to plan, according to the report. Among plans with single- or multi-tier match formulas, two-thirds of plans – covering 6 in 10 participants – promised a match of between 3% and 6% of pay. Most promised matches ranged from 1% to 6% of pay. The average value of the promised match was 4.3% of pay, while the median value was 4%, Vanguard notes.