Stretching the Match

About six years ago, a group from Hendrick Motorsports in Charlotte, North Carolina, including the president, chief financial officer (CFO), human resources (HR) staff and the retirement plan’s adviser, met to brainstorm ways to get participants to contribute more to the company 401(k).

At the time, Hendrick was matching 50% up to 5% of salary deferred, and the average deferral rate was 5.87%. According to Heather Masterson, the firm’s HR director, someone proposed matching more than 5% of salary deferrals. “The group wanted to increase employee deferrals but wasn’t sure it wanted to go up to the 10% recommended by industry professionals,” she recalls. “It felt 9% was a good target to get participants to defer, so the decision was made to match 33% of up to 9% of deferrals.”

Hendrick had to amend its plan document because the old formula was spelled out there. A change in the recordkeeping system and one in payroll were also made.

For the company’s efforts, the new match appears to have worked: As of March 31, the average participant deferral into the 401(k) was 9.47%.

The stretch match is not yet a widely utilized plan feature. According to the 2017 PLANSPONSOR Defined Contribution (DC) Survey, less than one-third (30.3%) of defined contribution plan sponsors use one. However, as Hendrick’s story shows, they can be a very effective means to get retirement plan participants to save more.

David Blanchett, head of retirement research at Morningstar Investment Management LLC in Lexington, Kentucky, says the company match is a powerful incentive to save for retirement. “It’s the anchor for a lot of people in deciding how much to save,” he says. “That’s why advisers would [want to]suggest the feature to plan sponsors, to help encourage better saving by participants.”Blanchett continues, “If plan sponsors want participants to have a successful retirement, the all-in savings has to be at least 15%. But if the company match is only up to 4% of salary deferrals, sponsors will see [approximately] a 4% savings rate by employees.”

Kathleen A. Kelly, managing partner at Compass Financial Partners in Greensboro, North Carolina, says stretching the match is a reasonable plan design consideration to incentivize the right behavior. “Plan sponsors should align the message of what they think employees should save to what they will match,” she says.

Masterson suggests that to successfully sell the concept of the stretch match to their clients, advisers should make sure the client understands it fully. Because Hendrick Motorsports’ match formula was atypical—not the usual 25% or 50% of a certain amount of deferrals—it took participants a while to grasp why the company made the change. She admits that, when she first came to the company—the stretch match formula was implemented a couple of months before her hire—she also thought it was odd.

“As the administrator of the plan, you have to get your head around it,” she says. “I had to follow the same process as I did with employees to understand how it works and how it benefits them. I had to put my plan participant hat on, and that helped with how I educated participants.” Masterson spent considerable one-on-one time doing the math with managers as well as with employees.

Not ‘Being Cheap’ but ‘Doing More’

Blanchett concurs that implementing a stretch match formula involves substantial communication to explain to participants why the plan sponsor is making the change. “Participants may perceive this as the plan sponsor taking away a benefit,” he says. “For example, moving from matching [a higher amount up to] 4% to matching [a lower amount up to] 8% may make some participants think the plan sponsor is being cheap. In addition, some participants may not be able to contribute the 8%,” he says. “Tell plan sponsors to convey to employees that they are asking participants to do more, and the plan sponsor will do more to help them.”

In Hendrick’s case, Masterson notes, showing the dollar value of the company match made a difference, too: In stretching the match, Hendrick was offering participants more money.

According to Kelly, “As with everything we do, it starts with providing data [and] then looking at a particular client’s objectives, what it has in place, and whether these two things align.” She adds that it is important to get a good understanding of work force demographics. “It’s very easy to look at a stretch match as a given, but with some clients—for example, those with hourly-based wages or lower average compensation among the work force—the plan sponsor doesn’t want a stretch match to have a negative impact on participants who can’t save at an 8% or 10% deferral rate,” she says. “For other plans, advisers can make the case to incentivize employees to save by stretching the match.”

When the stretch is so high that meeting it is out of reach, this is a disincentive, Blanchett agrees. “If the match moves beyond 10% of deferrals, it will be hard for many participants to save that,” he says.

The Match Plus Other Features

Blanchett says he often sees plan sponsors tie their match formula to the default deferral percentage in automatic enrollment. The largest proportion (40.7%) of sponsors that use that feature set the default deferral rate at 3%, the 2017 PLANSPONSOR DC Survey found. Only 17.6% use a default of 6%, and just 7.7% use a default greater than 6%.

As an example, Blanchett notes that the most common matching formula is 50% of up to 6% of salary deferred, but this gets participants only to an all-in savings rate of 9%. “Setting a higher default percent and linking the match formula to that is definitely worth a conversation with plan sponsors,” he says.

Some plan sponsors want participants to save beyond the match, but the formula is not incentivizing that behavior, Kelly says. Some plan sponsors have a lower default contribution percentage, but use automatic deferral escalation to get participants to save up to the full match. “And, with the power of inertia, even auto-escalating to a savings rate above the match formula means participants are unlikely to opt out,” she suggests.

She cites the following to show how to ease plan sponsors into a better stretch match formula. “We have clients we worked with through the financial crisis that had to suspend their DC plan match. When the match was reinstated, it gave us a great opportunity to talk about changing the formula,” she says. Compass advisers started to lay the groundwork by suggesting smaller matches for higher deferral amounts—for instance, matching 10% up to 10% of salary deferrals—but as sponsor clients’ financials improved, they could move to matching 20% of up to 10%. “It was all dependent on the client’s willingness to commit to additional dollars,” she says.

Blanchett says he understands that sponsors worry about DC plan budgets, but a stretch match can be done in an effective way that adds nothing to sponsors’ costs. In addition, it will be encouraging employees to save successfully.

Art by Dadu Shin