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How Valuable Is the Stretch Match?

DC Plan Design

Some plan sponsors and administrators “stretch the match” as a way to increase participants’ contributions to their retirement savings accounts. Does the strategy work? A recently released study seeks to find out.

Stretching the match is a practice in which an employer sets a higher employee contribution threshold in order for an employee to qualify for a matching contribution to the employee’s retirement plan account. To wit: rather than provide a 100% match of a contribution of 4% of pay, the employer would give a 50% match of a contribution of 8% of pay. In “Stretching the Match: Unintended Effects on Plan Contributions,” Vanguard studies whether this meets its intended purpose. 

Vanguard cites a report by the National Bureau of Economic Research (NBER) in which it reported that it found that the level where the employer match is maximized is “an anchor” for some participants and that employing higher savings thresholds, rather than lower ones, is more effective in increasing employee contributions. And Vanguard adds that its research shows employees’ willingness to contribute at a higher rate; they found in 2016 that 20% of participants set their salary deferrals at the rate that met the maximum worth of the employer match, but 50% deferred a higher percentage of their compensation than the employer match. 

“These findings,” Vanguard writes, “have led to the idea that stretching a match is a strategy to increase overall contribution rates for plan participants at no additional cost to the employer.”

In 2016, Vanguard studied 328 voluntary enrollment plans with a single- or multi-tier match formula. They collectively had 452,783 eligible nonhighly compensated employees (NHCEs), a 56% participation rate and a median deferral rate of 2%. Their median age was 42, and median income was $48,264. Vanguard studied plans that had paired matches of 100% on 3% to 5% of pay, and 50% on 6% to 10% of pay. 

Vanguard reports that participation rates in the plans with 100% matches were 20% to more than twice as high than those that stretched the match value to a higher threshold. And it also found higher deferral rates with an increase in the size of the employer match. It reports that the deferral rate was 73% higher for plans with a 5% match, 67% higher at 4%, and 31% higher with a 3% match. “The estimated deferral rate for the 100% match designs results in participants’ receiving more of the full promised match,” says Vanguard, adding, “Our comparison of contribution rates in paired plans promising identical match values suggests that 100% matches on lower match thresholds are associated with higher aggregate plan contribution rates.” 

Action Steps

“Seemingly counterintuitively,” Vanguard says, plan sponsors should consider plan designs with 100% match formulas if they want to raise plan contribution rates. Vanguard says that stretching a match “may have unintended consequences" for NHCEs.

“Our research shows that higher initial default deferral rates in automatic enrollment plan designs are the most effective way to raise employee-elective deferral rates,” says Vanguard. 

But Vanguard still sees a place in the formula for stretch matches. It suggests that an effective strategy to increase retirement savings could include adopting automatic enrollment with a “strong initial default deferral rate,” instituting automatic annual deferral rate increases and providing stretch matches. 

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