We have discussed 401(k) plans in the past, either by simply mentioning retirement planning in passing or dedicating full posts to the subject. If you are a client or a follower of this blog, you know that HR Strategies offers 401(k) programs, retirement planning, college financial planning, and many other ways for you and your employees to save money. Recently, an article came out by Stephen Miller concerning 401(k) matching. Miller is an online editor/manager for SHRM, the Society for Human Resource Management. The article, entitled, “401(k) Match: ‘Thresholds’ Drive Participation More than Rates: A sampling of the wide variety of matching formulas”, discusses the importance of employer-to-employee communication in regards to choosing a 401(k) plan matching formula. Miller draws from a July 2012 report by Brigitte C. Madrian, the Aetna Professor of Public Policy and Corporate Management at the Harvard Kennedy School of Government. Her findings show that changing matching formulas can result in higher savings for employees, while keeping the employer contribution the same. Here is a basic scenario using two example formulas from the article:

Employee A and Employee B earn the same yearly salary: $100. Here are the two match formulas they have to choose from:

Employee A	Employee B
50% of the first 6% of Salary	25% of the first 12% of Salary
EE Contribution/Quarter=$6	EE Contribution/Quarter=$12
Remaining Yearly Salary=$94	Remaining Yearly Salary=$88

Employee A sees the higher match percentage and goes with the 50% of the first 6% of salary. Employee B does a few equations, and decides to go with the 25% of the first 12% of salary.

50% of the first 6% of Salary	25% of the first 12% of Salary
50% x (6% of $100)	25% x (12% of $100)
50% x $6	25% x $12
ER Contribution/Quarter=$3	ER Contribution/Quarter=$3

As you can see, the employer contribution is the same for both employees. However, as we go further, we see that there is a definite difference in the employee savings.

EE Qtly Contribution+ER Match=$9	EE Qtly Contribution+ER Match=$15
Employee Earns= $36/year	Employee Earns=$60/year
$94(salary)+$36(contribution)= $130	$88(salary)+$60(contribution)= $148

Madrain states that there is a risk that employees are more likely to perceive the higher rate/lower threshold as a better savings plan. However, in the example above, we can see that even though the employer match is the same for both employees, by choosing the lower match rate/higher threshold, Employee B is earning an extra $18 a year. Furthermore, the effect of higher savings is compounding! Employees contribute to their 401(k) on a pre-tax basis, thus increasing savings and take-home pay, while setting aside money for their retirement. In most cases, and with proper alignment of education and diversification tools available, higher deferrals typically result in higher returns, increasing the compounding effect of savings. While those of you who are well versed in the language of 401(k) might see this as common sense, a majority of your employees may not see it that way. This is why the article stresses the importance of making sure your employees are in the know about 401(k) matching. The cost will stay the same for you, the employer, but your employees will be benefiting from increased savings and the knowledge that their employer has helped them work towards stability in their financial future. The Employee Retirement Income Security Act (ERISA) identifies the fiduciary responsibilities of plan sponsors to include education of participants and eligible employees. Lack of education often leads to inadequate diversification of assets and thorough understanding of the plan’s features. Each plan sponsor must ensure that they dedicate the proper resources and time to thoroughly educate their employees about their 401(k) plan. Don’t forget, HR Strategies offers a variety of retirement savings plans. Our knowledgeable HR Consultants will help your employees with their 401(k) needs, while helping you to fulfill your fiduciary responsibilities.

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