Time to Stretch the Match?

One of the key elements of the so-called “ideal” DC plan, along with auto-enrollment and auto-escalation, is the stretch match. A relativity new concept, very few plan sponsors are using it — which can be both a good thing and a bad thing for advisors.

Let’s review the stretch match, including its benefits and the objections to it.

If a plan offers a match of 50% of the first 6%, for example, a stretch match might offer 25% of the first 12%, which comes out to the same percentage (assuming comparable adoption rates by participants) but forces participants to defer more to get the full match. Research and common sense shows that people tend to defer at or close to the match; most people are not likely to defer more. It’s also important to spell out what the actual dollar amount is, rather than percentages, which most people don’t understand.

Objections or concerns voiced at many TPSU programs by plan sponsors include:

  • People who cannot afford to defer up to the full amount will miss out on matching dollars they got previously.
  • Those who are deferring up to the match will lose some benefit.
  • Highly compensated employees may not be able to defer up to the full match.

Responses to these objections are that the DC plan is for the benefit of a majority of the workers and, if highly compensated employees cannot defer enough to qualify for the full match, a nonqualified plan might be a better option. Secondly, the amount of money these workers might miss out on is relatively small. Overall, a stretch match benefits the majority of people who might be incentivized to defer more, and it will help the company save money and increase productivity if more people are able to retire on time. As with most things, there’s a cost/benefit analysis and a decision to make.

While saving money is not the goal of a stretch match, it can help defray increased costs for plans that have a match and auto-enroll workers.

Plan advisors can get stuck in a “sea of sameness,” especially as the DOL’s final fiduciary rule results in more advisors acting as a fiduciary. The stretch match is new and really interests plan sponsors who see the obvious benefits — which means it can be a way to distinguish your advisory practice.

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