Mon, November 21, 2011
There are no guaranteed investments, but the employer matching contribution comes awfully close. Why are so many workers passing up the opportunity to get free money?
Last month, human resources consulting firm Aon Hewitt released a report entitled, “Navigating the Path to Retirement: 2011 Universe Benchmarks Highlights, 2011.” The study examined the behavior of over 3 million employees who were eligible for defined contribution plan participants.
Looking at data from 2010, the study found that about 76% of all the employees eligible to participate in defined contribution retirement plan – 401(k), 403(b), and similar plans – actually took advantage of these retirement savings tools. The average before-tax contribution was 7.3% of wages.
One remarkable finding of the study was that on average, 30% of whose who did participate in employer-sponsored savings plans did not contribute enough to take full advantage of the matching funds provided by their employers. Among employees in their 20s, 43% failed to make enough contributions to get the full employer match.
In many cases, employers match employee contribution dollar-for-dollar, which is as close to a guaranteed 100% return on an investment as you’ll ever get. It’s true, of course, that subsequent investment performance of the matching funds may be disappointing. You do have to be careful, for example, if the employer match is all in company stock that cannot be sold. But short of experiencing a 50% decline, the employer match becomes an incredible windfall. Even a less-than-100% employer match is usually a fantastic deal for employees.
It’s hard to understand why anyone participating in a 401(k) or similar plan would not at least want to maximize the employer match. For employees at the low end of the income scale, saving enough to qualify for the full employer match might be a stretch. Or perhaps there are a few employees saddled with high-interest rate debt who need to focus on paying it off. Except for people in that situation, workers ought to be taking full advantage of having their retirement savings matched by the employer.
The long-term consequences of saving for retirement are substantial, and the importance of private retirement savings is likely to become more important as Congress begins looking at ways to cut federal spending. Even if Social Security is not directly affected by budget cuts, there are a variety of ways that the burden of paying for retirement could be shifted towards personal savings.
A “sure thing” like the employer matching contribution should be a no-brainer for most people. The Aon Hewitt report found that setting up new employees with default levels of savings that must be over-ridden has been a successful way of encouraging retirement savings, and suggests that default savings levels should be set at or above the level that employees must have to participate fully in employer matching funds.