Better-paid workers command better retirement plans.
A new study by researchers at the University of Pennsylvania's Wharton School and The Vanguard Group found that workers in high-paid jobs receive better retirement plans than workers in low-paid jobs, despite federal pension regulations intended to assure equitable retirement security for rank-and-file workers.
"If you work for Vanguard or the University of Pennsylvania, you get an (employer) match," but you don't get a match if you are a lower-paid worker at a smaller company, said Stephen P. Utkus, director of the Vanguard Center for Retirement Research, Malvern, Pa., and one of the authors of the study. Mr. Utkus presented the study last week at a conference of the Pension Research Council at Wharton.
The study by Olivia S. Mitchell, director of the Pension Research Council; Tongxuan "Stella" Yang, a doctoral student at Wharton; and Mr. Utkus concluded that the implicit incentives in employer-sponsored retirement plans to spur savings by low-paid workers are not working as well as they should.
Defined contribution plans with generous employer matches, more investment options, more equity fund options, a company stock option, loan features and the ability to invest after-tax contributions are aimed at providing tax-sheltered compensation to higher-paid employees.
"Firms appear to be maximizing compliance with non-discrimination rules while minimizing matching contributing costs," the study said.
In other words, companies with high-paid workers are more likely to have higher employee contribution rates because tax-sheltered savings are more meaningful to those in higher tax brackets. The design of 401(k) plans is "strongly motivated by a desire to satisfy higher-paid employees' demand for tax-advantaged compensation," the study noted.
"Who you work for really matters," Ms. Mitchell said.
Even though half the employers studied contribute 3% of pay, employers' expenditures on matching contributions are far lower — 1.9% of pay — because some workers fail to participate in the plan, or fail to contribute at the highest level to receive the full match.
In their study, the authors suggest lawmakers and regulators find ways other than employer matches to raise the savings rate by lower-paid workers, such as automatic enrollment and a guaranteed minimum contribution for all workers regardless of whether they contribute.
"Tax-motivated matching contributions in 401(k) plans may be an imperfect way of ensuring broad-based retirement security," the authors said in the study.
The study focused on savings patterns by 740,000 participants at 507 401(k) plans in Vanguard's database.