The article, “Rethinking the Company Match,” may be of interest. It describes a study of the impact of employer matching contributions under automatic enrollment. Among other things, the study found that automatic enrollment’s success in increasing employee participation is only marginally dependent on whether a company makes a matching contribution. According to the study, participation rates in savings plan (e.g., 401(k) or 403(b)) using auto enrollment decline only modestly when an employer match is eliminated or reduced. The article discusses ways to utilize funds currently dedicated to a company match (for employers that might consider reducing a company match upon instituting automatic enrollment). This would include the contribution to the plan of an employer non-contingent/nonelective contribution, use of the matching contribution savings to reduce participant-paid retirement plan fees and/or enhance other benefits.
In our view, an employer may be reluctant to reduce an existing match upon implementing automatic enrollment. There may be concerns that the reduction in the match may be viewed as a “take away” by employees. Also, some plan sponsors like the idea of rewarding employees for participating in a savings program. Also, in many cases, the match is viewed as an effective benefit for recruiting and retaining employees.
Even though auto enrollment will increase overall participation in retirement plans that provide only a non-contingent/nonelective contribution, there may be additional pressure for employees to opt-out of automatic enrollment. The concern seems to be that employees might feel adequately funded as a result of receiving the employer’s contribution and consequently believe there is no need to contribute their own pay to the plan. This reaction is known as “income effect.”
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