Matchmaker, Matchmaker, Build Me a Plan

While simplified investment choices can boost employee participation in a 401(k), nothing meets that goal as well as a robust cash or stock contribution that matches part of what the employee saves.

“The existence of a match is the number one driver for participation” by employees in their company’s 401(k) plan, says Susan Alford, a senior vice president in Aon Consulting’s benefits group.

While there are many variations in matching formulas, an employer pay-in of 50 percent up to the first 6 percent of salary that the employee contributes is increasingly considered to be the standard. Matches should be stretched out across as big a percentage of pay as possible to move workers to allot higher percentages of their paychecks to their 401(k)s, says Michael Weddell, a Watson Wyatt consultant in Detroit. For instance, 50 percent on the first 6 percent of pay is better than 100 percent on the first 3 percent.

Whatever the formula, some kind of match is better than none. The absence of one can convey the impression that it’s OK not to save at all, “instead of it being a necessary part of one’s retirement planning,” according to Weddell. By supplying a percentage match, on the other hand, an employer can cue employees about the proper level to contribute. For example, says the consultant, looking at a plan designed with a 6 percent match, an employee might think, “it seems to me that 6 percent is the right number.”

Matches can also be shaped to make up for the demise of a traditional pension. When Rockwell Collins freezes its defined-benefit plan later this year, senior management wants its 401(k) to remind workers of a traditional DB plan. Just after employees stop earning new pension benefits in September, the Cedar Rapids, Iowa-based company will start making payments to its workers’ 401(k) accounts amounting to 0.5 percent to 6 percent of their salaries, divided into six ranges.

To mimic the structure of the frozen pension plan, the company has designed a point system under which the amounts paid in will be based on such factors as the employee’s age and length of service. The new contributions, piled on top of the 75 percent match in company stock of the first 8 percent of salary that Rockwell has provided for years, were an attempt to replace some of the funding lost to the pension freeze and to prompt employees to save more, Rockwell Collins executives say.

Similarly, in announcing that it will freeze its defined-benefit pension plans as of December 31, 2007, IBM stated that it will also aggressively expand its 401(k) benefits. Big Blue will provide current plan participants with an annual company-funded contribution of as much as 10 percent of their salary. This new benefit will be part of IBM’s new 401(k) Plus Plan and requires the company to double the current dollar-for-dollar company match to a maximum of 6 percent of salary deferrals. It also requires the company to provide an annual special savings award of 5 percent of salary to participants’ 401(k) savings plan.

Officials also said that IBM will make added automatic contributions of 1 percent to 4 percent of employees’ pay into their 401(k) accounts. Further, IBM will automatically open accounts for employees who do not contribute to the plan, ensuring 100 percent employee participation in the 401(k).

Another way to determine the amount of the match is to link its size to that of corporate profits. That method can provide an incentive for employees to stay with a strong-performing employer, advocates say. Because Call 4 Health, a medical answering service firm in Boca Raton, Florida, pays percentages of its net profits into their 401(k) accounts, employees can get a sense of taking part in the company’s growth, says CFO Nicholas Koutrakos. Net profits have burgeoned 20 percent a year for the last five years, according to the finance chief, who notes that the company’s average turnover rate of two years compares favorably to the six-month rate of some of its peers.

But a profit-sharing match at a company with more volatile results can create months of uncertainty for participants. Such plans force employees to choose their contributions before they know what their employers will contribute, according to Weddell. Informing employees that a match will be determined by year-end profits “sounds like a pretty weasely promise,” he contends.

One alternative is simply to inject cash into the plan, with no strings attached. RLI Corp., a Peoria, Illinois property-casualty insurer that will terminate its DB plan this year, contributes an automatic 3 percent of salary to every employee’s 401(k), even if the employee contributes nothing. (The company has an added profit-sharing portion that last year amounted to about 2 percent.) “A match penalizes those least able to contribute to retirement,” contends Jeff Ficke, the company’s vice president for human resources. “If employees can’t participate, they lose the contribution.”

This article is excerpted and adapted from “Building the Perfect 401(k) Plan,” which will be published February 15 in the special Human Capital issue of CFO magazine.

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