Are Employers Optimizing Their 401(k) Match? New Research from Yale, MIT, and Vanguard Offers New Policy Ideas
According to new research, many retirement plans are exacerbating pay inequity. Employer contributions to these plans disproportionately accrue to those with higher incomes, white workers, those with more access to liquid wealth, and those with richer parents.
For example, employer contributions are highly concentrated, with 44% of dollars occurring to the top 20% of earners. Moreover, 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. Employees who do not take full advantage of their employer match effectively get paid less than their peers who, for a variety of reasons, can and do save more.
While retirement plans provide a tax efficient way to save, and workers can benefit from employer matches, employer contributions are a potentially ripe target for innovation.
In new research by Tobin Faculty Affiliate Cormac O’Dea and Yale PhD student Guillermo Carranza, together with coauthors Fiona Greig and Anna Madamba from Vanguard, and Taha Choukhmane and Lawrence D.W. Schmidt from MIT, they outline three criteria for firms to consider in designing their retirement match schedules:
- Equity: Are employer contributions equitably distributed?
- Efficiency: Does the plan design encourage savings?
- Cost: How costly is the plan?
These criteria can help sponsors make the tradeoffs in plan design explicit, and offer simple metrics that employers might use to evaluate their plans.
While one size may not fit all and no single formula is a clear winner, these equity, efficiency, and cost considerations can be used to help plan sponsors evaluate how they are using their contribution budgets. For example, employers could prioritize plan features that promote savings for lower-income workers, such as autoenrollment, or immediate eligibility and immediate vesting. Dollar caps on employer contributions could help pay for such features. Non-elective contributions (which all employees receive, regardless of their own savings choices) can be a useful tool for ensuring that all employees receive some retirement contributions. The findings can help inform policymakers in decisions on regulations (for example, safe harbor rules), which contribute to shaping firm retirement plan design choices.
Read the full Policy Brief here: Are employers optimizing their 401(k) match?