cfo.com

Print this article | Return to Article | Return to CFO.com

Operation Match: Richer 401(k) Benefits

Employers have been raising their defined-contribution plan matches to compensate employees for cutbacks in defined-benefit pensions and retiree medical benefits, an expert says.
David M. Katz, CFO.com | US
February 27, 2007

The gold standard for employer matches to employee 401(k) contributions has moved steadily upward toward the 100 percent mark over the last five years, according to a recent study by Mercer Human Resource Consulting.

The portion of 401(k) plans with a match rate of 100 percent has risen from 26 percent of plans in 2002 to 36 percent in 2006, the study, which is based on an analysis of more than 900 U.S. companies with defined-contribution retirement plans.

To be sure, a match of 50 percent on the first 6 percent of pay that an employee contributes remains the most typical formula, says Mike Weddell, a Mercer principal in Detroit. But the use of that scheme has fallen from 52 percent to 45 percent of employers over the last five years, according to the study.

(Mercer's analysis did not capture levels of employee contributions for which matches are provided, a measure that some consider an important trigger of employee 401(k) contributions. For example, if an employer provided a 100 percent match on the first 3 percent of pay that an employee saved and 50 percent on the next 2 percent of pay contributed, the firm coded the match at 100 percent, according to Weddell.)

Employers have been raising their matches as way of compensating employees for cutbacks in defined-benefit pension plans and retiree medical benefits, according to the consultant. What's more, 401(k) match boosts supply employees with "a very visible benefit, so these tend to be increased," he says.

An increasingly popular formula is the so-called "safe harbor match"—a 100 percent match on the first 3 percent an employee saves, and 50 percent on deferrals between 3 percent and 5 percent of pay, according to Weddell. The formula exempts 401(k) plans from Internal Revenue Service tests that compare salary deferral and match percentages for highly paid and non-highly paid employees.




CFO Publishing Corporation 2009. All rights reserved.