We'll never know if St. Valentine would've loved 401(k)s, but we can be pretty sure he'd have liked the idea of the company match. His name, after all, has been linked to matchmaking for centuries. The earliest written reference to this appears in 1382 in Geoffrey Chaucer's Parliament of Foules in the lines:
For this was sent on Seynt Valentyne's day
Whan every foul cometh ther to choose his mate.
It seems nearly as long as St. Valentine's Day has been associated with lovers that 401(k)s have been associated with the company match.
The employer match, while not required, has been a very popular feature of the 401(k) plan. Still, several industry thought leaders question the need for matching, especially as more plan sponsors add auto-enrollment and auto-escalation features to their 401(k)s.
Studies in behavioral finance had brought into question the effectiveness of matching. In a 2010 paper, researchers Choi et al found employees—even when there was no cost to obtain the match—often failed to do so. By focusing only on employees 59 ½ and older, the study considered only those workers who could immediately obtain the match (since they were old enough to withdraw without penalty). They found the typical worker lost 1.6 percent of their salary by failing to match. In the worst case, the loss was 6 percent of the worker's salary.
Despite these results, the company match still works. Even a small 50 percent match can work wonders over time. For example, an employee contributing $100 a month over 30 years will have made a total contribution of $36,000 over those 360 months. A 50 percent match, growing at an average of 8 percent per year, at the end of this 30-year period would have amassed $74,766. That's more than twice what the employee contributed.
Moreso, studies have shown that high matching rates will move up the average deferral rate of employees. Brigitte Madrian's paper “Matching Contributions and Savings Outcomes: A Behavioral Economics Perspective” showed that providing a 50 percent match up to 6 percent of pay encouraged employees to defer at a 6 percent rate. Even though the dollars offered are the same, this was better than providing a 100 percent match up to 3 percent since employees generally only deferred at a rate lower than 6 percent (usually 3 percent or 5 percent). Madrian takes this one step further and suggests employers might better help employees by providing a 25 percent match up to 12 percent of pay.
Imagine how much retirees would have loved their 401(k) had they deferred 12 percent a year since they started working.
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Christopher Carosa
Chris Carosa has been writing a weekly article and monthly column for BenefitsPRO online and BenefitsPRO Magazine since 2011 and is a nationally recognized award-winning writer, researcher and speaker. He’s written seven books, including From Cradle to Retire: The Child IRA; Hey! What’s My Number? – How to Increase the Odds You Will Retire in Comfort; A Pizza The Action: Everything I Ever Learned About Business I Learned By Working in a Pizza Stand at the Erie County Fair; and the widely acclaimed 401(k) Fiduciary Solutions. Carosa is also Chief Contributing Editor of the authoritative trade journal FiduciaryNews.com and publisher of the Mendon-Honeoye Falls-Lima Sentinel, a weekly community newspaper he founded in 1989. Currently serving as President of the National Society of Newspaper Columnists and with more than 1,000 articles published in various publications, he appears regularly in the national media. A “parallel” entrepreneur, he actively runs a handful of businesses, including a small boutique investment adviser, providing hands-on experience for his writing. A trained astrophysicist, he also holds an MBA and has been designated a Certified Trust and Financial Advisor. Share your thoughts and story ideas with him through Facebook (https://www.facebook.com/christophercarosa/)and Twitter (https://twitter.com/ChrisCarosa).
