While the so-called “stretch” match has been touted as a mechanism to encourage higher savings rates with no additional cost to the employer, a recent study suggests that the stretch match has its limits. This week we asked NAPA-Net readers to share their experience(s).
With a stretch match, rather than offering a 50 cent match on every dollar contributed to a 401(k) plan up to 5% of a participant’s salary, a sponsor might offer 25 cents on every dollar up to 10% of salary for the same cost. The idea is, of course, that participants – whose rates have traditionally clustered around the rate of employer match – will be inclined to “stretch” their own rate of savings to the higher level in order to get the full match.
Attesting to the popularity (or at least commonality) of the design, nearly 81% of the respondents to this week’s NAPA-Net Reader Poll say that they work with plans that have a stretch or tiered match. The history of that design was a bit murkier: 70% of the respondents say that while some of their plan sponsor clients had always had it in place, others had switched to it. Another 15% had always had the tiered match in place, and the remaining 15% had never had one.
Defer ‘Reals’?
“Murky” also seems an apropos way to characterize the impact of that approach; half said it worked “sometimes” in terms of encouraging higher deferrals, and another third commented that it “depends.” On the other hand, roughly 1 in 10 said it didn’t serve that purpose, while the remaining 6% said it was effective. No one responded that it didn’t encourage those higher deferrals, however.
“More often than not it works, as long as the match cap is low enough (10% or less, 8% or less ideally),” noted one reader. Echoing those sentiments, another reader observed, “I think it makes sense for going from say 100% match on the first 3% to 50% match on the first 6%, but above 6%, I would think there would be diminishing returns. In the example of offering 25% on 10% – seems a bit of a ‘stretch.’”
Another commented, “I think the stretch match is a great way to afford implementing automatic features. In the plans where we stretch the match and simultaneously add auto enrollment or escalation, we see a great impact.”
“As long as it isn’t too high,” one cautioned. “We don't have any clients that go beyond 8%. Guess where most of their deferrals land? 8%.”
However, one reader acknowledged, “It is not a popular option with our clients.”
Dollar ‘Store’?
The results were only a little less ambiguous when it came to the efficacy of the design in “stretching” employer contribution dollars. Among this week’s respondents, 44% said it was “sometimes” effective in that regard, and another 11% said, “It depends.” However, a third said it did reduce employer contribution dollars, though another 11% commented “mostly not.”
“Sometimes the price tag associated with very successful auto features is a deterrent,” commented one reader. “Suggesting a stretch match at the same time to keep cost estimates in line is a good way to implement this impactful plan design.”
“If there is auto enrollment tied to the match, it really doesn't stretch the contribution $,” noted another. “Lower paid workers that need their salaries to live on are just not able to contribute up to the top stretched match. It doesn’t work for them. A stretched match does work for employers, as they will likely get to contribute less,” said another reader.
“I feel that a 100% match at a lower deferral rate works best in getting participants to defer when you do not have an automatic enrollment feature. So ‘no,’ I feel that the stretch match is not effective for non-highly compensated individuals. Highly compensated individuals generally already contribute at a higher rate,” said another.
Editor’s Note: Those comments sync up with the findings of the aforementioned Vanguard report based on a study of some 328 voluntary enrollment plans, which suggests that a stretch match may not fare as well. In fact, plans with a 100% match had participation rates that were from 20% to more than two times higher than the plans that stretch the same match value to a higher threshold.
Among this week’s respondents, just over half (53%) had recommended a stretch/tiered match to clients, a third had to some, but not all, of their clients. Among the remainder (who had not done so), one reader commented, “I would recommend it in the right situation depending on the make-up of the workforce.”
Reader Comments
As for reader comments, we got a number. Here’s a sampling:
- “No one match idea works all the time with all sponsors/employees, but if it helps a few more employees save a bit more, then it is worth it. Behavior and budgets do not change overnight, so I recommend giving the stretch match time to catch on, a minimum of two years, and a good education program to promote it.”
- “I have found that employees do actually care about the rate of the match. Contribution rates above 50% seem to drive behavior but once it falls below that level (most of my experience is with the 25% level) employees who would never have enrolled at say 8% to begin with will not in many cases opt to elect for that amount of savings. They will usually opt to go in at a lower level, i.e., 4% or 6% and most are then receptive to put in an automatic increase program to a higher level, i.e., where the match caps out. Contrast that to a 50% match or better and employees will try to defer 6% to get the entire match, the same logic is true at that point about the automatic increase option, but then they’re commonly open to 10% or more. I’ve also seen resistance at the sponsor level to stretching the match. For different reasons, both HR and Finance commonly have objections. HR feels diluting the match is like offering someone a backhanded compliment and doesn’t bode well for employee relations. Finance in many cases will conclude the lower paid employees cannot afford to save up to stretch levels and feels more compelled to match 100% at a lower level to benefit everyone. I’ve also seen finance object to higher thresholds where HCEs may be limited in their deferrals due to ADP/ACP testing. I’m inclined to agree with this article, the stretch match has been oversold.”
- “I think a match that is too high, where participants are frustrated, can hurt participation. You need to look at income, demographics, etc.”
- “I've actually seen matching pushed by the wayside the last bunch of years, as clients get more bang for their buck out of a Safe Harbor. The Safe Harbor/Profit Sharing contributions can be used in combined plan testing where a Cash Balance is in place, but a match won’t do anything for you.”
- “The 4% Safe Harbor guarantees that the plan will pass testing, and it also guarantees that most of the employees will never retire. People need at last 12-15% contribution for a minimal retirement. $0.40 on 10% is the same corporate cost. Auto enrollment and auto deferrals will get employees to where they must be! And at the same corporate cost.”
- “An advantage, obviously, if it works to increase the employee deferral rate. The disadvantage is that lower income workers who can’t afford to save more than 3-5% or whatever prior company 100% match was, now receive a reduced match with a big compounding effect over time. It may even change behavior to where workers don’t feel like the reduced match is worth it.”
- “I think it can work to a point, but if you stretch too far, it starts to look unattainable for at least some of the workforce. I think robust financial education would likely do more to increase savings behavior than stretching the match.”
Thanks to everyone who participated in this (and every) week’s NAPA-Net Reader poll!
