The ERISA consultants at the Learning Center Resource Desk, which is available through Columbia Threadneedle Investments, regularly receive calls from financial advisors on a broad array of technical topics related to IRAs and qualified retirement plans. A recent call with an advisor in Michigan is representative of a common inquiry regarding 401(k) plan matching contributions. The advisor asked:
“What is the percentage of 401(k) plans that provide matching contributions on an annual vs. per-payroll-period basis, and does one method have an advantage over the other?”
- According to several surveys, the majority of 401(k) plans that offer matching contributions make the match on a per-payroll-period basis as apposed to annually. According to the Plan Sponsor Council of America’s 58th Annual Survey, 75% of plans match on a per-payroll-period basis while just 18.5% do so annually. Similarly, the 2015 PLANSPONSOR DC Survey found that just over 14% of plans surveyed match on an annual basis as compared to 66% that match on a monthly or more frequent basis.
- The plan document, in most cases, will specify when and how the plan will make any matching contributions.
- As far as whether one method has an advantage over the other, the answer depends on from whose perspective you are looking.
- From the plan sponsor’s perspective, making the match at year-end could be a cost saving measure as well as a way to help keep key workers. Plans can be designed so that a worker only earns the right to a matching contribution if he or she is employed as of the end of the year. Those who are not, do not receive the match.
- From a participant’s perspective, one advantage of a per-payroll match is the ability to take advantage of dollar-cost averaging, where participants invest a fixed amount on a regular schedule over a long period of time. The amount of money invested at each interval remains the same over time, but the number of shares purchased varies based on the market value of the shares at the time of a purchase. When the markets are up, the participant is buying fewer shares per dollar invested due to the higher cost per share. When the markets are down, the situation is reversed and the participant is purchasing a greater of number of shares per dollar invested. The end result is an average cost per share over time.
Conclusion
Most 401(k) plans that provide matching contributions calculate the match on a per-payroll-period basis. Refer to the plan document or summary plan description regarding the details of a specific plan’s matching contribution.
The Learning Center Resource Desk is staffed by the Retirement Learning Center, LLC (RLC), a third-party industry consultant that is not affiliated with Columbia Threadneedle. Any information provided is for informational purposes only. It cannot be used for the purposes of avoiding penalties and taxes. Columbia Threadneedle does not provide tax or legal advice. Consumers consult with their tax advisor or attorney regarding their specific situation.
Information and opinions provided by third parties have been obtained from sources believed to be reliable, but accuracy and completeness cannot be guaranteed by Columbia Threadneedle.
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