Sponsors Juice Up 401(k) Plans

Companies are responding to the retirement crisis by beefing up their defined contribution plans, new research suggests.

It’s become a well-worn story: Baby Boomers reaching retirement age with insufficient financial resources to see them through the rest of life, and younger workers not socking away cash at a rate that would help them avoid that fate themselves.

Those sad realities are making retirement benefits a more visible element of overall employee rewards than ever. Employers that opt to contribute more money to their 401(k) plans or otherwise do more to help employees prepare for retirement are responding to a clear, strong demand.

Companies’ increasing interest in doing that is manifesting in several ways. For one, they’re getting more aggressive with employer-matching contributions. According to the latest biannual research on defined-contribution plans by consulting firm Aon Hewitt, matching employee contributions dollar for dollar up to 6 percent of an employee’s wages was the single-most-used formula in 2013. For each of the six previous periods addressed in earlier surveys, matching only 50 cents per dollar up to 6 percent of wages was the most-employed formula and always significantly beat the dollar-for-dollar approach.

retirement bag of moneyTo some degree, the surge in employer matches reflects the continued trend of large companies opting to freeze defined-benefit pension plans and, as partial recompense, juicing up their 401(k) plans. (The survey was heavily weighted toward larger companies; 93 percent of the 407 participants were from firms with more than 1,000 employees, and 25 percent had more than 25,000 workers.)

But, says Rob Austin, director of retirement research at Aon Hewitt, “Certainly there is a cohort of employers that are very focused on maximizing individuals’ plan balances at retirement. Today that’s one of the strongest incentives they can offer to employees. Ultimately it will benefit not only the employees but the employer as well.”

Companies have a clear interest in influencing workers to retire when the time comes. If older employees can’t do so for financial reasons, they may lack the physical strength to perform some types of work, be less engaged than younger employees, have a higher incidence of disability, and cause a hike in the company’s health-insurance premiums, Austin notes.

That company interest is so great that among 13 measures employers might view as the most important in evaluating a 401(k) plan’s success, the top pick was the plan’s ability to facilitate retirement income. Trailing well behind was the plan’s contribution to attracting and retaining employees, which historically has been considered the primary reason for offering any type of employee benefit.

Still, the survey portrays a great dispersion in what’s considered to best indicate a plan’s degree of success. That’s because companies have different motivations and expectations of employees. At one end of the spectrum might be a retail chain, where turnover is high and hardly anyone sticks around for decades. A 401(k) plan is relatively unimportant to that employer, Austin notes. One the other end of the spectrum might be an energy or mining company, which badly needs long-term employees endowed with a wealth of technical and institutional knowledge.

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