Age, income, tenure cited as reasons small group leaves money on the table
Updated with correction
Participants in defined contribution plans are increasingly contributing enough to take full advantage of employer matches, thanks to plan design changes and a greater emphasis by employers on targeting communications to those who are falling short.
Despite the progress, sponsors and researchers concede there's a persistent percentage of participants who contribute below the employer match threshold for reasons ranging from salary to tenure to age.
Only 4% of employers don't provide any contribution to participants, said an annual survey by Vanguard Group Inc., Malvern, Pa., covering 2017, of its record-keeping clients. Forty-four percent provide a matching contribution, 11% provide a non-matching contribution and 41% offer both matching and non-matching contributions.
"We keep chipping away," said Annette Grabow, retirement program manager for the Charleston, S.C.-based Sonepar USA, noting the company's overall annual employee deferral rate is now 5.94%, or just below the corporate match of 50 cents per dollar up to 6% of annual pay.
"We're making progress but it's a slow process," said Ms. Grabow, whose company 401(k) plan has $712 million in assets.
Annual reports by Alight Solutions, Lincolnshire, Ill., a record keeper whose clients are primarily very large plans, show steady improvement in recent years among the percentages of participants contributing enough to meet or exceed their employer matches. It was 80% last year (50% exceeding and 30% meeting the match), representing a steady overall improvement since 2013's figure of 73% (43% exceeding and 30% meeting), according a report, published in May, that covered 127 DC plans record-kept by Alight with more than 3 million participants. Ninety-nine percent of Alight's clients offer some form of match.
Age, salary and tenure had a direct link to participants exceeding, meeting or falling below the employer match, the Alight report said.
Among five age groups, the highest percentage of workers contributing below the match was in the 20-29 group, and the lowest percentage was in the 60-plus group. The latter group had the highest percentage of workers exceeding the match; the former group had the lowest percentage.
The same trend was evident among five salary classes. The highest percentage of employees contributing below the match was in the $20,000-$39,000 group; the lowest percentage was in the $100,000-plus group. The latter group had the highest percentage of workers exceeding the match; the former group had the lowest percentage.
Tenure also figured prominently in Alight's match analysis. The shorter the tenure, the higher the percentage of workers failing to meet the match. The longer the tenure, the higher the percentage of workers exceeding the match.
The match matters
Regardless of what participants do, research by Cerulli Associates shows that match is the most important factor cited by 401(k) participants in beginning to save for retirement and also increasing their 401(k) plan contributions.
"Our survey data seems to suggest that the match works," said Jessica Sclafani, director of retirement practice for Boston-based Cerulli. "It's a bright spot in the defined contribution industry."
When given choices asking why they began saving for retirement, 51.1% of participants cited the employer match. The next highest responses: 42.7% said they could now afford to start saving for retirement and 27.7% cited the tax benefits.
And when given eight choices about what prompted them to increase their 401(k) plan contributions, 70.5% said taking full advantage of the employer match was "very motivating." The next highest 'very motivating" responses were a salary increase or bonus (53.2%) and tax savings (37.4%). The Cerulli survey was based on responses from 1,011 active participants in 401(k) plans during the second quarter of 2018.
Sponsors interviewed by Pensions & Investments cited some common themes for participants contributing below their company match, such as personal financial circumstances and inertia. Salary and age played a role; but in some cases, the youngest weren't necessarily the least likely to meet the match.
At Sonepar USA, Ms. Grabow said 50% of active participants contribute from 1% to 5% annually to their 401(k) plan, while 23% meet the match at a 6% contribution rate and 27% contribute 7% or more annually. The Sonepar plan auto-enrolls new employees at 3% of annual pay, allowing them to opt out.
Ms. Grabow said the primary reasons for below-match contributions are participant inertia and the lack of email access by some employees such as drivers and warehouse workers. Lower-paid workers might be less inclined to meet the match, but she said age wasn't automatically a factor.
Sonepar was a 2018 winner in the P&I Eddy Award contest for an education campaign that included an appeal to participants to meet the company match. One-on-one sessions with financial advisers, which was part of the campaign, helped workers improve contributions, Ms. Grabow said.
This year, Sonepar sent a targeted email and postcard to employees contributing below the match. Another targeted communication will go out later this month and a third will be sent in November. Halsey Cook, the company's president and CEO, sends a quarterly social media commentary extolling the value of the match.
McLaren Health Care Corp., Flint, Mich., has won Eddy awards in each of the last three years for education campaigns encouraging employees to start enrolling in its 403(b) plan, increasing their contributions and/or meeting the employer match.
The 2016 award was for a campaign that likened gardening — "Seed It. Feed It. Water It. Grow It." — to nurturing retirement accounts by raising contributions to meet the match.
This year, McLaren will unveil a campaign informing participants that they can belong to one of three clubs — the enrollment club (for those who haven't contributed), the 6% club (for those who meet the match) and the club honoring those whose annual contributions exceed the match. The campaign is expected to start this month.
Joining the clubs doesn't lead to any awards "other than their satisfaction" in saving for the future, said Donna Aho, corporate manager, retirement services.
Last year, 47% of active participants met or exceeded the match of 50 cents per dollar up to 6% of annual pay. McLaren also contributes 2% of annual pay to participants regardless of whether they contribute to the 403(b) plan, which has about $1 billion in assets, Ms. Aho said.
Ms. Aho said younger and newer employees are the most likely to contribute below the match as well as those who have fewer technical skills.
Age, inertia, salary and participants' belief that they couldn't afford it led to some employees at Oncor Electric Delivery Co. LLC, Dallas, contributing below the company match for its $775 million 401(k) plan, said Brett Powell, manager benefits-pension and thrift. Among those contributing 5% of pay or less — the match threshold is 6% — Mr. Powell said 32% were under 30 and 24% were between 30 and 39.
Last September, Oncor identified 656 employees contributing below the match, about 17% of active participants. The company offers a match of 75 cents per dollar up to 6% of annual pay for employees eligible for the company pension plan and a dollar-for-dollar match up to 6% of annual pay for employees eligible for a cash balance plan.
Oncor conducted a postcard campaign aimed at employees contributing below the match with the theme: "How much money are you leaving on the table?" The seven-week campaign led to 102 employees raising their deferral rates, including 68 who raised their contributions to 6% or higher. Oncor's efforts led to a 2018 Eddy Award.
Oncor auto-enrolls new employees at 3% of annual pay, and it has an annual 1% auto escalation, bringing the maximum automatic feature contribution to 10% of pay per year. Starting Aug. 1, Oncor will raise the initial auto-enrollment deferral to 6% for new employees.
Sponsors like Oncor that use auto features say this design prods participants into saving more to at least meet the match.
"Auto enrollment is a big thing" in stimulating participants' contributions, said James Choi, professor of finance at the Yale School of Management, New Haven, Conn. "The more likely they are to participate, the more likely they are to meet the match."
Auto escalation plays an important role in bringing participants' contributions up to employer match levels. The Alight Solutions survey noted that among workers contributing below the match, 32% are subject to auto escalation. "Over time they will eventually contribute at a rate high enough to receive the full employer match," the report said.