Every year, U.S. employers contribute around $250 billion to their employees’ retirement accounts, and many employer-sponsored retirement plans adhere to a safe harbor match formula. A retirement plan’s match formula determine show much money workers receive and how much employers spend on the plan, but are the commonly used match formulas designed well?
We evaluated current match formulas and found two potential drawbacks: Many workers don’t take full advantage of their employer match, and the majority of employer match dollars accrue to employees who already contribute beyond the match cap.
Better match formulas pair nonelective contributions with a “stretched match,” which is a lower match rate paired with a higher match cap. The potential gains from adopting better match formulas are significant and broad based. Updating the match formula of every retirement plan in our sample to a savings-maximizing equivalent formula would ensure that every eligible worker receives a retirement contribution and could increase the average employee saving rate by around0.4 percentage points of pay, all without an increase in employer costs.
Moving the most popular safe harbor-adhering plans to their savings-maximizing alternatives could generate an additional $6.7 billion in employee retirement contributions at no additional cost to employers and without increasing inequality in employer contributions. We propose a new safe harbor match formula: an one elective contribution of at least 2% plus a 25% match of employee contributions up to 8% of pay, with automatic enrollment and immediate vesting.
