Are 401(k) matching contributions all that?

When you’re saving for retirement in a 401(k) account, the standard advice is to contribute enough to capture your employer’s matching contribution. That makes sense, since the contribution represents a risk-free 100% return on every dollar you save. 

The match is intended to be an incentive that encourages saving – but recent research shows that there are better ways to get people to sock away their money. And in many cases, the current structure of matching programs actually contributes to pay inequity.

“When we first created an employer match, we thought that was the carrot – the incentive that would get people to participate,” says Fiona Greig, global head of investor research and policy at Vanguard and co-author of a recent research brief on matching contributions. “But now we have a much heavier hammer.” That hammer, Greig says, includes the rise of plan features like auto enrollment, auto escalation of contribution rates and higher initial default contribution rates. “These are the things that, without opening your eyes or engaging in any way, cause people to participate and save more over time,” she adds.

Matching contributions are a big, expensive feature of the 401(k) system. Vanguard notes federal government data showing that employers contributed $212 billion to defined contribution retirement plans in 2021 – about 58% of all dollars saved. 

Vanguard, one of the nation’s largest administrators of 401(k) plans, evaluated more than 1,300 large retirement plans that the firm administers. The research doesn’t conclude that employers should stop matching employee contributions – far from it. But it did find that employee saving rates don’t vary much across plans with different levels of employer matches. 

In my latest Reuters column, I explore the plus-minus of matching contributions, and the impact of automatic enrollment.