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American workers might be frustrated that their paychecks aren’t rising as fast as they would like, but there are indications that companies are compensating workers more generously on the back end with greater 401(k) matching contributions. This isn’t altruism, however; HR and benefits experts say employers are realizing that there are business advantages to offering better retirement benefits.
“Now you’ve got organizations that don’t have defined benefit plans anymore and are concerned that their employees aren’t going to be prepared for retirement,” said Byron Beebe, U.S. market leader of the retirement and investment practice at Aon Hewitt.
According to a report published last month by the Vanguard Group, the average employer contribution last year was 4.7 percent of employee pay, up from a trough of 3 percent in 2009 and up nearly a full percentage point over 2015.
“Three things are leading to this,” said Jean Young, senior research analyst at the Vanguard Center for Investor Research.
More companies today have introduced retirement plans with automatic enrollment at a default of 4 to 6 percent. “The most common default 10 years ago was 3 percent,” Young said. When employers realized that many workers just choose the default contribution, they began increasing those percentages.
Safe-harbor provisions designed to make sure that 401(k) plans benefit lower-paid workers as well as executives are another contributing factor in the growth of employer contributions, Young said, along with the growth of spread-out or tiered matching policies that require greater employee contributions.
Vanguard found that the most common employer-match contribution was $0.50 on the dollar on up to 6 percent of pay, and the second most common was a dollar-for-dollar match on the first 3 percent of pay plus $0.50 on the dollar for the next 2 percent.
“More individuals are getting a bigger piece of the match,” Young said. “If you have a larger proportion of individuals getting more of the match, that’s going to translate to larger employer contributions overall.”
The growing spotlight on 401(k) plans reflects the decrease in defined benefit pensions.
Making Retirement Attractive
“Retirement has become a more critical issue and maybe a higher area of focus,” said Amy Reynolds, partner at Mercer. “We’re seeing employers think more broadly around their relationship with employees around retirement.”
“Defined contribution presents a liability if those employees aren’t retirement-ready,” said Ken Verzella, vice president, innovation of investment solutions at MassMutual Retirement Services, part of MassMutual Financial Group.
MassMutual found that roughly 40 percent of employees get a match of 5 percent or higher, as companies are realizing that it’s also in their best interest to make sure their retirement-age employees are financially stable.
When employees stay on the job because they can’t afford to retire, their engagement and productivity can diminish, and their age makes providing health insurance for them more expensive, Verzella said.
In addition, it’s harder for employers to promote younger workers if senior-level positions are filled by people who can’t afford to leave. Since career development is a top concern for millennials, experts say employers today need to offer room for advancement if they want to attract and retain the new talent they need to remain competitive.
“It creates another problem when employees don’t leave. That next generation that’s ready to move up, there’s fewer opportunities for them,” said Brian Kropp, practice leader at consulting firm CEB, now part of Gartner. "They aren’t retiring and creating the space for the next generation.”
Holding on to the Best Workers
More generous retirement benefits also help companies recruit and retain talent, especially in sectors where competition for talent is fierce.
“My sense from talking with HR execs is that this is a very tight employment market. They’re very worried about their top performers being poached away,” said John Challenger, CEO of executive outplacement firm Challenger, Gray & Christmas.
“They’re looking at perks, and 401(k)s are the foundation of most companies’ benefits today,” he said. “It’s been growing as unemployment has dropped below 5 percent, because there’s more pressure on companies to find people and hold onto them.”
Although companies’ balance sheets have been steadily improving in line with the overall economy, it still hasn’t delivered the expected jolt to wages.
HR experts say companies would rather offer more generous benefits than higher wages, because it’s harder to take away the latter when business slows.
For workers, this means they need to take advantage of more generous 401(k) benefits while they last. “The challenge with paying more is you create a cost and that cost is locked in,” Kropp said. “If you increase the 401(k) match, at some point in the future, you can reduce that.”