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Defined Contribution

Vanguard: Stretching company match leads to lower 401(k) participation rates

Stretching a company match leads to lower participation rates, thus thwarting a strategy by 401(k) plan sponsors to increase overall contributions, according to research by Vanguard Group.

"The headline is that it doesn't achieve the goals" that sponsors wanted, said Jean A. Young, senior research analyst at the Vanguard Center for Investor Research, in an interview.

"Stretching the match does not appear to lead to higher plan contribution rates," said a research report posted on Vanguard's website. "Any incentive to obtain the full stretched match is more than offset by a reduction in plan participation rates."

The goal of match stretching is to maintain the same amount of a company contribution to a participant while encouraging the participant to put more money into a retirement account.

"Sponsors are looking for ways to raise the participants' saving rates at no additional cost" to the plans, Ms. Young said.

For example, instead of a company matching $1 dollar for each dollar of a participant's contribution up to 3% of annual salary, the company would contribute 50 cents on the dollar up to 6% of annual salary.

However, Vanguard found that participation was lower among plans with stretched corporate matches, such as when it compared dollar-for-dollar matching vs. 50 cents for each dollar of matching at several levels of contribution.

At the 3% annual pay level, the participation rate was 61% at the dollar-for-dollar level vs. 52% at the 50 cents for each dollar level. At a 4% annual pay level, the respective participation rates were 71% vs. 34%. At the 5% annual pay level, the respective participation rates were 63% vs. 35%.

"Stretching a match may have unintended consequences for non-highly compensated employees," the report said.

"I'm tired of hearing consultants recommending this," Ms. Young said. "Everybody out there is saying it, but nobody is measuring it."

Vanguard's research was based on 401(k) plans that offer voluntary enrollment for participants who are considered non-highly compensated employees, or people earning less than $120,000 per year.

Auto-enrollment plans were excluded "because it is well-known that the defaults chosen in automatic enrollment in plan designs have a strong effect on plan participant behaviors," the report said.

The report covered 2016 data because compliance testing data wasn't available in more recent years. Vanguard selected 328 voluntary enrollment plans that met the research guidelines. These plans had a total of 70 match formulas, so Vanguard chose 124 plans that enabled it to compare dollar-for-dollar policies vs. 50 cents-on-the dollar policies at the different deferral levels.