Are Employers Optimizing Their 401(K) Match?

Abstract

We propose criteria that employers can use to evaluate their match formula: equity, efficiency, and cost. Recognizing that plan sponsors have different objectives and constraints, we offer the criteria to help sponsors make the trade-offs in plan design explicit and help them meet their goals. In two-thirds of plans, employer contributions exacerbate pay inequity. Employer contributions are highly concentrated, with 44% of dollars accruing to the top 20% of earners. Many common formulas, including safe harbor designs, disproportionately benefit higher-income employees. An employer match is efficient if it encourages workers to save more. Employee saving rates vary little across plans with different levels of employer matches. The majority (59%) of employer contributions accrue to the 41% of employees who save more than the match cap, suggesting they would have saved just as much without the match. Employer contribution costs vary widely. No single formula is a clear winner in terms of efficiency, but dollar caps are more equitable and contain costs. Nonelective contributions that decouple employer contributions from employee choices can also be designed to achieve equity objectives. Policymakers could do more to promote equity. Adopting additional safe harbor standards with equity considerations could nudge plans toward more
equitable designs.

Keywords: 401k, employer contributions, defined contribution plans, savings, retirement plans, retirement savings, savings incentives, Vanguard, 401(k)

JEL Classification: D14, D15, D22, G51, H31, H32, J12, J26, J32, M52