What Are the Most Common Matching Formulas?

Employer matches in 401(k) plans are often used as a recruiting tool as part of employee compensation packages, but there are wide variations in the design of matching formulas. 

For example, consider that in 2020, Vanguard administered more than 180 distinct match formulas for plans offering an employer match, according to the firm’s annual How America Saves report.

Overall, half of Vanguard plans provided only a matching contribution in 2020, and 55% of participants were in such a plan. A third of plans—covering 4 in 10 participants—provided both a matching and a nonmatching employer contribution. 

Another 10% of plans provided only a nonmatching employer contribution. In this instance, 3% of participants were in this type of design. As for plans that made no employer contributions of any kind in 2020, Vanguard reports that only 4% of plans chose not to, affecting 1% of participants. 

Among plans offering a matching contribution, 72%—covering 62% of participants—provided a single-tier match formula, such as 50 cents on the dollar on the first 6% of pay. Less common, used by 21% of plans—covering 27% of participants—were multi-tier match formulas, such as a dollar-for-dollar match on the first 3% of pay and 50 cents per dollar on the next 2% of pay.

The matching formula most cited as a typical employer match is 50 cents on the dollar on the first 6% of pay, which is the match most frequently offered by Vanguard DC plans, the report notes. Among plans offering a match, about one in six provided exactly this match formula in 2020, covering 14% of participants.

Another 5% of plans (covering 9% of participants) had a single- or multi-tier formula but imposed a maximum dollar cap on the employer contribution, such as $2,000. A very small percentage of plans used a match formula that varied by age, tenure or similar variables, the report further observes. 

Types of Matching Contributions, 2020 Estimated

Match Value

Vanguard also found that the promised value of the match varied substantially from plan to plan in 2020. Among plans with single- or multi-tier match formulas, most plans promised a match of between 3% and 6% of pay. The average value of the promised match was 4.5% of pay, while the median value was 4%.
In addition, the report notes that the average promised employer matches remained relatively stable from 2011 through 2016. Since 2016, average match rates have increased slightly through 2020, while median promised matches have remained stable since 2015.

Regarding the employee-elective deferral needed to realize the maximum value of the match, Vanguard found that about 8 in 10 plans (covering 77% of participants) in 2020 required participants to defer between 4% and 7.99% of their pay to receive the maximum employer matching contribution.
The report notes that the average employee elective deferral required to maximize the match has remained relatively stable since 2011, with an average between 6.8% and 7.4%. The required median deferral remained constant at 6.0%.

And while some plan sponsors employ “stretch the match” formulas to increase contributions, Vanguard says that its research finds that higher match thresholds are typically associated with lower plan participation and lower employee contribution rates. 

Vesting

As for those vesting schedules for 2020, nearly half of plans immediately vested participants in employer matching contributions, according to the research. Overall, 47% of participants were enrolled in these plans. 

A quarter of plans with employer matching contributions used a five- or six-year graded vesting schedule. Here, one in six participants with employer matching contributions were in such a plan.

Other findings show that 4 in 10 plans vested participants immediately for other employer contributions, such as profit-sharing or ESOPs. On the other hand, Vanguard notes that 36% of plans with other employer contributions were using a five- or six-year graded vesting schedule. In this case, 3 in 10 participants receiving other employer contributions were in plans with these longer vesting schedules.

The findings are based on retirement plan data from 4.7 million DC plan participants across the firm’s recordkeeping business, comprised of 1,400 plan sponsors and $1.7 trillion in DC assets under management.