Employer contributions are increasingly prevalent in 401k plans, according to an updated study. The BrightScope/ICI Defined Contribution Plan Profile: A Close Look at 401(k) Plans, found that in 2018, 87% of large 401k plans (which covers more than nine out of 10 401k participants) had employer contributions.
Employers who choose to make contributions can either match contributions by employees or make contributions regardless of employee contributions. According to the report, the popular way for employers to contribute is with a simple match formula, which is used in 51% of large plans.
After some corporations suspended matching in 2020 as part of broad cost-cutting measures, many are looking to restart their matching programs later this year.
“The employer matching contribution is one of the most important features of the 401k system,” Investment Company Institute (ICI) Senior Director of Retirement and Investor Research Sarah Holden said in a statement. “These contributions help employers provide a competitive benefit option to attract workers and directly support employees in building their retirement nest eggs.”
Employers use variety of match formulas
Among the majority of large 401k plans with employer contributions that have simple match formulas, the most common formula (used by 22% of large 401k plans with simple matches) was matching 50% of contributions up to 6% of employee salary.
The next most common simple match formula (used by 13% of large 401k plans with simple matches) was a match of contributions 100% up to 4% of employee salary. Altogether, the most common match rates for employer contributions were 50% (used by 42% of large 401k plans with simple matches) and 100 percent (used by 35 percent of large 401k plans with simple matches).
“The data show 401(k) plans are working—as designed—to provide employers with flexibility to customize them to suit the needs of their unique workforces,” added Brooks Herman, executive director of data and research at BrightScope, an Institutional Shareholder Services Inc. business.
Investment options, plan fees, and TDF trends also reported
Other key findings of the study include:
- 401k plans offer participants a wide variety of investment options with the average large 401k plan offering 28 investment options: 13 equity funds, three bond funds, and eight target-date funds.
- 401k plan fees trended downward between 2009 and 2018. BrightScope’s total plan cost measure—including all fees on the audited Department of Labor Form 5500 reports, as well as fees paid through investment expense ratios—was 0.94% in 2018, down from 1.02% in 2009.
- Target date fund use has risen over time with 84% of large plans offering target-date funds in their investment lineups compared with 32% in 2006.
Lynn Brackpool Giles is a contributing editor to 401(k) Specialist. Giles is a former Managing Director of Communications and Consumer Services for the Financial Planning Association (FPA), where she oversaw all corporate, legislative, and consumer communications. In her current journalistic practice, she is a frequent contributor to numerous financial services industry publications.
