Tiered contributions seen as move to bolster equality

Putting annual contributions into employees' retirement savings accounts ensures that employees across the pay scale have something saved for retirement, but it's a move employers rarely make.

American Express Co. is among the few. In March, the credit card company raised the bar on automatic contributions by putting more into the accounts of its lower-paid workers than its higher-paid employees, or "tiering" the contributions.

Lower-paid workers saw a contribution equal to 3% of their pay posted to their 401(k) accounts, with higher-paid workers receiving 2%. The so-called non-discretionary company contribution was on top of a match that Amex gives its employees, up to 6% of their pay.

"While our lower-paid colleagues were deferring at a slightly lower rate than our higher-paid colleagues, their actual account balances were lower, so we wanted to make sure that we were giving our lower-paid colleagues a bit more of a boost," said Barbara Kontje, Amex's New York-based director of retirement and smart saving, during a panel discussion at Pensions & Investments' Defined Contribution West conference in San Diego in October.

Ms. Kontje said the company prompted employees to look at their 401(k) accounts when the contribution was made, just as they do every quarter with Amex's matching contributions. It's important, she said, "to let them go see dollars and cents how much money the company is putting in."

Ms. Kontje, who declined to be interviewed for the story, oversaw a team that won an Excellence & Innovation Award for its work on the $6.1 billion 401(k) plan's redesign.

Few employers offer tiered non-discretionary company contributions such as at American Express, with many organizations balking at the cost. But industry experts praise the contributions as a way to help the most financially vulnerable.

"It's a move toward equity," said Jana Steele, a senior vice president and defined contribution consultant at Callan LLC in Chicago, adding that "it's a great way" to make sure that lower-paid participants are able to save for retirement.

Barbara Hogg, a partner of wealth solutions for Aon PLC in Chicago, echoed similar views. The more financially vulnerable tend to be lower-paid, so having "some kind of non-elective really helps those folks," she said, referring to non-discretionary contributions.

Ms. Hogg noted that even in plans with 97% participation, tiered automatic contributions can be helpful. The 3% not contributing to their workplace retirement plans tend to be the most financially vulnerable so an automatic contribution would guarantee that they "at least get something," she said.

Industry experts applauded American Express' generosity but acknowledged that not all employers can afford to do what American Express is offering.

"I think it's very responsible of American Express to take an action like this with the intent to help their lower-paid employees, but I do know that benefit dollars are carefully parceled out, and it may not be a viable option for all plan sponsors," Ms. Steele said.

To be sure, tiered non-discretionary contributions such as Amex's are not a majority practice. "It's not completely uncommon but not the norm," said Amy Reynolds, a partner and U.S. defined contribution leader at Mercer in Richmond, Va.

While Ms. Reynolds did not have exact numbers, she and other industry experts said that employers that opt to give participants contributions on top of a match tend to give discretionary profit-sharing contributions, which vary from year to year based on the organization's performance. In fact, Amex's current non-discretionary contribution replaces a discretionary profit-sharing contribution it had in place since the 1990s, when such contributions were popular, Amex's Ms. Kontje said.

Tiered non-discretionary contributions are most prevalent at organizations that transitioned to defined contribution plans from defined benefit and tend to be used with greater frequency in the banking industry, which has experienced a more pronounced shift to DC plans, according to industry observers.

"We do see it more of it in the financial services industry and specifically in the banking industry," Aon's Ms. Hogg said, adding that banks often give flat dollar amounts almost like a union plan.

"If you're in this bucket of pay, you get this amount," she said of non-discretionary contributions at banks.

Aside from cost, plan sponsors will look at employee demographics to determine whether to implement an automatic contribution. "It really comes down to understanding the demographics of the population, understanding how the current benefits are being utilized to see where there are potential gaps or opportunities to further people's overall retirement savings," Ms. Reynolds said.

"It sounds like American Express went through that exercise and saw some opportunity with some of those lower-paid folks that they could address through this type of design," she said.

Companies that implement tiered automatic contributions tend to take a paternalistic view of their workplace retirement plans. Those giving more to their lower-paid workers see it as a way to "recognize the need to protect the lower-paid and make sure that they have enough retirement income" on the assumption that the higher-paid have the ability to save more, Aon's Ms. Hogg said.

Higher-paid employees have a greater ability to get the full match and max out their 401(k), which plan sponsors see people doing, she said.

"It's a cultural and philosophical thing," added Robyn Credico, defined contribution consulting leader at Willis Towers Watson PLC in Las Vegas. Some companies believe you "have to pay to play," meaning employees need to contribute to their retirement accounts to benefit from company contributions, while others want to take care of their employees "no matter what they do themselves for savings," Ms. Credico said.

"If you are a company that wants to encourage retirement savings for all employees, this would be a good idea," she said, referring to non-discretionary contributions.

Rather than implement non-discretionary contributions, employers these days lean more toward upping their company matches, according to Mercer's Ms. Reynolds.

"We haven't seen an emergence of an interest in non-elective contributions, whether weighted more towards the lower-paid or not," she said. "I'd say we see more of a transition to larger matching contributions than implementing non-elective contributions in the last couple of years."

Ms. Reynolds said that many employers have reported that employees don't appreciate the automatic contributions. Plan sponsors are finding that employees "tend to focus only on the match" and that non-discretionary employer contributions "don't quite get valued and appreciated to the extent that they probably could or should," she said.

"Participants just do not seem to see the value," Ms. Reynolds said.

While mystified by the reports, Ms. Reynolds added that they're not unique. "We've heard this on multiple occasions from organizations," she said.

Nevertheless, industry experts generally see non-discretionary contributions as a potent recruitment and retention tool.

"Recruitment is a challenge for a lot of companies and giving a non-discretionary contribution of a reasonable amount would be a pretty good attraction tool," Willis Towers Watson's Ms. Credico said.

Callan's Ms. Steele agreed, saying it's a particularly strong tool for employers with a heavy population of employees over age 45 who they're trying to incentivize.

With staffing so tight, "it can be a very powerful tool to retain employees," she said.