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Leaving Match On The Table: Part 1 of 2 - Connecting the Dots.

02/06/2018
By Jack Towarnicky

Yesterday morning, I ran into three dots.  Here’s how they connect (at least in my mind):

  • A full page E*trade ad in the Wall Street Journal, page B5 on February 5, shows a burrito, wrapped in foil, with a bite taken out of it.  It has the headline: "This burrito costs more than one what 1/3 of Americans have saved for retirement.”  The ad does not cite any particular study.  Apparently, this may be an accepted fact among those who read the Wall Street Journal, 
  • Ashlea Ebeling's February 5 Forbes article: "The New Employer Match:  How Generous is Your Boss?" Ashley highlights an increasing number of employer-sponsored plans that have amended their plans to match a portion of workers' contributions that exceed 6% of pay. One benefit professional is quoted as saying: "Some radical employers moving to a 25% match on 12%."  Why is it that many, perhaps most employers calculate the match based on the first 6% of pay contributed?  I offer a $50 gift card to whoever can identify the history or origins of 6% (or offer the best fable) (contact me at jack.towarnicky@psca.org).  Perhaps it is in the Old Testament, right after the verse that confirms vacation accrual rates must increase based on completed past service.  
  • Finally, back to the Wall Street Journal, page A2, for Josh Mitchell's article titled:  "The Mounting Student-Loan Shortfall."  Josh confirms taxpayer liability for federally-backed student loans will likely exceed the cost to taxpayers from the Great Recession’s bank bailout - the Troubled Asset Relief Program! More than six million have entered the income-driven repayment scheme with a goal of taxpayer-paid student debt forgiveness – that is an 8-fold increase in the past five years!  Those six million are in addition to the nearly five million borrowers who already defaulted (went more than a year without making a payment).  

Twenty-five years ago in 1993, I served in a plan sponsor role for the 401(k) offered by my Fortune 100, insurance and financial services company. That year, my employer hosted a delegation of Japanese insurance/financial professionals.  The visitors wanted to consider developing a defined contribution, employer-sponsored retirement system for Japanese workers - much like the 401k plan offered at a Japanese-owned auto plant just a few miles from our Home Office.  After all scheduled briefings were completed, the Japanese visitors had a final request - to speak to an actual plan sponsor.  With only a half day left on their visit, I was called in to discuss the plan we offered to our own workers.  

Our plan had been in effect since 1968 - a full 25 years. Eligibility was one year of service. The match was 50% of the first 6% of pay – mostly unchanged since plan inception. Seventy six percent of eligible employees were contributing (so, only about 60% of all workers participated). In 1993, the average deferral percentage for non-highly compensated employees was 4.2%. The Japanese executives listened patiently as I described how our plan had changed over the past 25 years, in part due to the Tax Reform Act of 1986. All of this went through an interpreter (as if our tax code wasn't already confusing enough). When I finished, the visitors had only one question:  (paraphrased)  “What is your duty to those who do not participate and those who do not save enough to get the full employer support?”  My initial answer was compliance-focused in terms of what was required - mandatory disclosures, etc.  But, it was clear to me that they wanted to know if there was some greater duty to encourage participation, so, I followed-up with a description of our communications and marketing efforts.  

Yesterday’s dots reminded me of that encounter.  Later, our plan would make increasing participation and contribution rates, as well as obtaining the maximum employer match, a specific goal.  We implemented a number of provisions designed to minimize the chances that workers would inadvertently leave employer financial support "on the table," including but not limited to:

  • A "true-up" of the cumulative, year-to-date employer match with every biweekly paycheck, 
  • Individual, annual, customized outreach to those contributing less than 6% of pay, showing them the foregone match, 
  • Individual customized outreach specifically focused on workers who were not participating, yet had become 100% vested and/or reached age 59 1/2, 
  • Adding catch-up contributions when they first became possible,  
  • Adding Roth 401(k) contributions when they first became available,  
  • A phased implementation of automatic enrollment – ultimately setting the default to the level needed to garner the full match, 
  • Perennially applying automatic enrollment to those who opted out or who were not receiving the full match,   
  • Adding after-tax 401(a) contributions for non-highly compensated employees, and 
  • Implementing in-plan Roth conversion provisions when they first became possible.   

All of the above were a very good start. In 2010, I retired from that employer - leaving behind two pending, much more aggressive innovations that were also designed to fill those gaps.       

What do you do?  What design, marketing and communication features do you deploy when workers fail to save, or fail to save enough, to obtain the full employer financial support?  Send me your best ideas.

Next:  Leaving the Match on the Table?  Part 2 of 2:  401(k) Innovations to Make Up for Missed Opportunities.

More detail on this and other 401(k) best practices is coming next week when we release PSCA’s 60th Annual Survey.

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