When it comes to behavioral nudges to encourage higher participation and contribution rates in 401(k)s, stretching the match is good—but the “autos” are better.
A recent research paper from Vanguard says the match stretch is a “strategy proposed to increase plan contributions in plans not opting for automatic enrollment.”
“When defined contribution plan sponsors stretch the match, they apply an existing dollar match to a higher contribution rate,” it explains. “For example, instead of matching 100% on the first 4% of pay, they match 50% on the first 8% of pay.”
The idea is that the higher match threshold will encourage participants to contribute more to the plan.
So how does it actually affect participant behavior?
“We find that higher match thresholds [with the stretch] are typically associated with lower plan participation and lower employee contribution rates.”
And higher match values without the stretch are typically associated with higher participation and higher employee contribution rates.
“Absent a case study of a plan that stretched the match, we analyze a group of plans with match formulas that mimic or simulate this strategy,” authors Galina Young and Jean A. Young report. “We find that contribution rates decline by 25% to 50% when the match is stretched.”
Automatic on top
Automatic enrollment remains a “superior strategy” for plan sponsors seeking to raise plan contributions.
“Counterintuitively, stretching the match does not appear to lead to higher plan contribution rates. Any incentive to obtain the full stretched match is more than offset by a reduction in plan participation rates.”
“Alternatively, strategies such as automatic enrollment with strong initial default deferral rates and automatic annual deferral rate increases, coupled with stretched matches, could be used to improve saving rates,” they conclude. “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.”
With more than 20 years serving financial markets, John Sullivan is the former editor-in-chief of Investment Advisor magazine and retirement editor of ThinkAdvisor.com. Sullivan is also the former editor of Boomer Market Advisor and Bank Advisor magazines, and has a background in the insurance and investment industries in addition to his journalism roots.
