Match Game

Companies are making strategic use of 401(k) matching contributions, but are they toying with their employees' retirement?

Tools of Attraction

Most plan sponsors try to offer a matching program that is in sync with their competitors. “Plan sponsors are always looking at what the competition is doing in terms of matching,” says Lucas.

Some actively try to beat their competitors. Hoffman Estates, Illinois-based Sears, Roebuck and Co. fattened offerings in its 401(k) plan for new employees and rank-and-file workers under 40 years of age. Sears’s new matching program, which took effect in January, provides $1.50 for each dollar contributed by employees up to 1 percent of pay and dollar for dollar after that up to 4 percent of pay. “Our compensation and benefit system was not competitive with our best-in-class competition,” explains Sears spokesman Chris Brathwaite. “Now our company match will be ahead of all major retailers.”

Other companies have increased their 401(k) match to make up for cuts in traditional defined-benefit pension plans. In 2004, for example, NCR increased its match to 5 percent (dollar for dollar on the first 4 percent of pay; above that, 50 cents per dollar up to 6 percent of pay). Previously, the match had been 3.75 percent (75 cents per dollar on the first 3 percent of pay; above that, 50 cents per dollar up to 6 percent of pay). The $5.6 billion maker of ATMs and point-of-sale terminals made the change to lower its overall cost structure. Employees over 40 were offered a choice of continuing their participation in the company’s defined-benefit plan and participating in a 401(k) plan with the old match or freezing their traditional pension benefit and participating in the 401(k) plan with the new enhanced benefits. Employees under 40 had their defined benefits frozen and became eligible for the enhanced 401(k) program, and new hires will enroll in the enhanced 401(k) plan.

“This was a way of providing competitive and affordable benefits while at the same time containing costs,” explains John Hourigan, a spokesman at Dayton, Ohio-based NCR. The new measures, he says, are expected to reduce the company’s U.S. pension expenses to zero by 2007.

Ultimately the minimum match should be what is required to entice employees to enroll in their 401(k) plans. “Participation rates are about 10 percent higher for companies that offer a match,” says Robert Liberto, vice president of Segal Advisors, an investment consulting firm in New York.

Although there’s good evidence that a match increases participation in a plan, the role of the size of the match is less evident, according to Michael Weddell, a retirement consultant in the Southfield, Michigan, offices of Watson Wyatt Worldwide. “The research is not quite clear that having a more-generous match is better than having a less-generous match,” he says. “You get the bulk of participation by having any match at all. If you increase the match, it doesn’t seem to necessarily lead to higher participation rates.”

Whatever method a company uses to determine its match, people need to be educated about the match formula when they’re enrolled in a 401(k) plan, advises Weddell. “Employees should have a clear line of sight so they know what the incentive is for investing in the plan,” he says.

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