To stretch or not to stretch the match. That's the question plan executives often ask when redesigning their defined contribution retirement plans.
"We do get asked a lot about our thoughts on stretch matches for our clients," said Marc Howell, vice president of custom retirement solutions at Prudential Retirement in Philadelphia. "It's definitely something that plan sponsors are thinking about."
When employers "stretch the match," they essentially require employees to contribute more to their retirement plans in order to get the maximum employer contribution. Instead of, for example, matching employee contributions 100% up to a certain percentage of worker pay – say 4%, plan sponsors would match 50% up to 8% of pay.
The employer's maximum contribution would remain at 4%, but the employee would have to contribute twice as much to get it. Coaxing employees to contribute more while keeping employer matching costs the same is the goal behind the approach, a tactic that can work in some organizations but backfire in others, according to industry experts.
"Many people do think that stretch matches are helpful, and in the right situation they can be. However, they need to be designed with a lot of care to avoid accidentally hurting the very people you're trying to help," Mr. Howell said.
The use of stretch matches as a strategy to increase employee deferral rates stems from research showing that workers will use the employer's maximum contribution as an "anchor" to set their own contribution rates.
A paper published by the National Bureau of Economic Research in July 2012, in particular, gave momentum to the concept of a stretch match by showing the "match threshold," the rate at which employees must contribute to secure the maximum match, had a substantial impact on employee contributions, unlike the company's "match rate," which had only a small effect.
"Providing a match of 25% on contributions up to 10% of pay will induce individuals to save more than a match of 50% up to 5% or pay at a similar or lower cost to the organization providing the match," Brigitte Madrian, dean and Marriott Distinguished Professor in the Brigham Young University School of Business in Provo, Utah, wrote in the paper.
The match threshold, she said, likely served "as a natural reference point when individuals are deciding how much to save and may be viewed as advice from the saving program sponsor on how much to save."