PLANSPONSOR - March - April 2023 - 17

30TH ANNIVERSARY | PLAN DESIGN
HOW EMPLOYERS CONTRIBUTE TO THE MATCH
In 1991, when employers made contributions
they typically made profit-sharing contributions.
31%
made a discretionary
company
contribution.
18%
made a fixed match
based on participant
contribution.
Source: Plan Sponsor Council of America
Shrestha says regulations have supported shorter vesting
periods as a means to make participants' retirement savings
more secure. " We have a pretty mobile workforce nowadays, " he
says. " You don't want to handicap the employees who are saving
but, because they switch jobs, are set back, from a retirement
readiness perspective. Companies are moving to vest sooner
rather than later, and many now allow for automatic vesting. "
According to the 2022 PLANSPONSOR Defined Contribution
Survey, 81% of employees immediately qualify to receive matching
contributions once they may participate in their employer plan.
Another change in matches has been in how employers
make the match, which, pre-2001, often came in the form of
company stock.
" Then, when Enron collapsed, one of the issues was that all
of its employee 401(k)s were heavily invested in employer stock, "
says Catherine Collinson, CEO and president of Transamerica
Institute and Transamerica Center for Retirement Studies in
Cedar Rapids, Iowa. " That event precipitated a review of the
appropriateness-or,
rather,
the
inappropriateness-of
the
inclusion of employer stock in 401(k)s. Giving a match with
employer stock really ended after Enron. "
Another evolving trend among some employers over the past
few decades has been the use of a stretch match to encourage
employees to boost their savings amount without increasing
the employer's costs. Research findings on the results of such
matches, however, has been mixed, Alley says.
Embracing Behavioral Finance
The use of stretch matches, however, is one example of a broader
trend driving plan design changes since the 1990s: the applying
of research from the field of behavioral finance, as plan sponsors
attempt to use their design changes to nudge participants into
specific behaviors. The most successful such example, of course,
has been the rise of automatic-enrollment and automatic-escalation
features, which have utilized participant inertia to boost
plan participation.
" Over the past 15 years, we have seen that putting the power
of inertia to work for participants has proven to be effective, " says
Jeff Kobs, head of the benefits consulting group at John Hancock
Financial Services in Mansfield, Massachusetts. " Those features
did exist prior to the [Pension Protection Act of 2006], but it
wasn't until the PPA [became law] that plan sponsors really hit
the ground running with [the concept]. "
Over time, plan sponsors have leaned even further into
participant inertia, experimenting with increasingly higher
automatic deferral rates as awareness has grown that saving
3% is inadequate to prepare most participants for retirement.
Many retirement consultants instead suggest that savers must
sock away at least 10% to 15% of their income throughout their
working life to be financially secure after they stop working, says
Tom Armstrong, vice president customer analysis and insight at
Voya Financial in Walpole, Massachusetts.
" We found, through our research, that employees can
achieve a higher income-replacement ratio, and sponsors a
higher participation rate, even when the automatic enrollment
rates are set to 6%, 8% or higher, " Armstrong says.
Non-safe-harbor plans are increasingly thoughtful about
their match and vesting structure, particularly in today's tight
labor market, says Dori Drayton, a principal in CAPTRUST in
Grand Rapids, Michigan.
" More recently, in the past five years or so, we've been seeing
a lot more employers that want to benchmark their match, " she
says. " They want to know how they are stacking up against peers
in their industry, especially in their geographic area, where they
are competing for talent. "
Retirement Income
While the focus on improving participant outcomes remains, the
way that plan sponsors define that goal has evolved over time.
While the goal once was to help participants build the biggest
nest egg possible for retirement, plan sponsors are now looking
for ways to help participants stretch their funds as far as possible
through retirement.
" The industry believes that the 401(k) has done a pretty
good job of helping people save, but it's not as good at helping
people spend in retirement, which is a difficult problem, " says
PLANSPONSOR.COM March - April 2023 17
13%
gave a specific
percentage of
participant's pay.
In 2021, plans most
commonly used a match.
48%
of companies
made a matching
contribution only.
3%
made only a
discretionary
contribution.
In 1991, the
average 401(k)
match was 3.3%.
In 2121, the
average 401(k)
match was 4.4%.
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