Welcome back to our series on our book, “The Quintessential 401(k).” Today we’re going to discuss a cool plan design concept that will incentivize your employees to save more.
So what is the best way to design a retirement plan so that employees have enough money to retire?
One of the ways we help our clients is to change the structure of the matching formula to maximize the employee’s contributions while not increasing the cost for the employer. In a prior video, we discussed how employees, on average, need to save 10% of their pay to get to retirement on time and safely with enough money to have an enjoyable retirement.
One way you can get people to save more is to stretch the match formula. Check out the table on page 42 of our book for a visual, or refer to the 1:00 mark in the video above. Under the current match, each employee gets 50% of the employer’s money up to 6% of their compensation.
The problem with this matching formula is most employees will stop saving at 6% because they don’t feel like there’s a point in saving more if their employer won’t match them above 6%. A more effective incentive-matching formula would be to change the match to 50% of the first 2% and 25% of the next 8%.
For you, the employer, the out-of-pocket cost still remains at 3% of the employee’s compensation, but for the employee to get the full 3%, they will now need to save 10% of their pay. You have incentivized the employee to save more by stretching your matching formula, and you’ve done so with no additional out-of-pocket cost to you. That’s a win-win for everyone.
If you’re ready to learn how we can help restructure your 401(k) plan and implement these powerful strategies, please reach out to me. We can schedule a complimentary meeting and have your questions answered.