The Importance of Communication in 401(k) Offerings
 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:
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 | 
