Few retirement savings incentives are considered to be as successful as the employer match. More than half of employers match a percentage of employee contributions, according to the Plan Sponsor Council of America.
However, it may be time to revisit this approach. One in five employees is considering suspending or cutting their contribution because of the pandemic-fueled recession. At the same time, 25 percent of employers are thinking about suspending or reducing their match.
“These are tough times, but the current crisis presents an opportunity not to abandon the match but to reinvent it,” Shlomo Benartzi and Charlie Nelson write in The Harvard Business Review.
“For companies struggling to pay their match, there are ways to reduce costs while motivating workers to save. And for companies not planning suspensions or cuts, the strategies can improve the impact of the match on savings behavior.”
The fixed-dollar match
The authors suggest two solutions that can improve the effectiveness and efficiency of matching dollars.
The first is designed to get more people to save while also helping struggling companies reduce costs. It calls for companies to match a fixed-dollar amount rather than a percentage of pay.
For example, a company could give all of its workers $1,200 annually if they save at a sufficient level. That’s the equivalent of matching 50 cents on the dollar up to 6 percent of pay for someone making $40,000 a year, and it’s less than the typical cost of a current match.
A fixed-dollar match has this advantage: It’s clear and definite. It prompts employees to think about what they could buy with that extra cash — a thought process that may make it harder to leave the money on the table. Psychologically, it’s easier to forgo a 6 percent match than to pass up $1,200. And the fixed-dollar approach could be particularly helpful for lower-income workers, for whom the set amount would represent a larger share of salary.
The stretch match
The second approach is appropriate for employers that want to cut expenses in the present while encouraging workers to save in the future. It’s known as a stretch match, and while it’s not a new idea, it can help companies defer some matching costs during a recession.
For example, instead of offering 50 cents on the dollar up to 6 percent of pay, employers could offer 25 cents up to 10 percent or 15 percent of pay.
In the short term, this could save them money — possibly half of their matching costs. And if workers adjust their savings rate to the match cap, they will be putting aside more for retirement. This would happen gradually and, ideally, as the economy recovers, which would be to the long-term benefit of workers, companies, and society.
“By adopting one of these approaches, companies can demonstrate their commitment to the sufficiently funded retirement of their workers while keeping costs in check,” Benartzi and Nelson concluded.
“Of course, these are not the only strategies that could help workers and employers, and they might not be suitable for all companies. We encourage those employers thinking about cutting or eliminating the match to consult with their plan advisers on ways to retain it in a more effective form.”