If employees were offered a $1,300 bonus, they'd take it. So why do so many pass up the chance to potentially receive thousands of dollars every year in the form of a 401(k) match from their employer?
A May 2015 research report, “Missing Out: How Much Employer 401(k) Matching Contributions Do Employees Leave on the Table?” by Financial Engines, an investment advisory firm, estimates that Americans leave $24 billion in unclaimed 401(k) company matches on the table each year. The company examined the saving records of 4.4 million retirement plan participants at 553 companies, and found that 25 percent miss out on receiving the full company 401(k) match by not saving enough.
The typical employee who did not receive the full match left $1,336 of potential “free money” on the table each year, which equates to an extra 2.4 percent of annual income.With compounding, this could amount to as much as $42,855 over 20 years.
According to research by consultancy Aon Hewitt, referenced in the report, 92 percent of employers with 401(k) plans match employees’ 401(k) contributions, with the most common match being $1 for every $1 an employee contributes up to 6 percent of the employee’s annual salary.
“The 401(k) match is one of the best deals going for employees, providing an immediate guaranteed return per dollar invested, ” said Greg Stein, director of financial technology at Financial Engines, in a news release. “Maximizing [their] available 401(k) match is a key way for millions of American employees to improve their retirement security. While many people might feel like they can’t afford to save more, we hope that this study helps them realize what they are leaving behind.”
Those Most Likely to Miss Out
Lower-income and younger employees were much more likely than others to miss out on at least part of their employer matching contribution, according to the report. For example:
•42 percent of plan participants earning less than $40,000 per year do not take full advantage of the employer match, compared to just 10 percent of employees earning more than $100,000 annually.
•Employees under age 30 are approximately twice as likely to miss out on the employer match compared to employees over the age of 60 (30 percent vs. 16 percent).
However, for many employees, middle age poses additional savings challenges. Financial Engines found that as employees grow older, they are more likely to take advantage of their company match—with the exception of those between the ages 35 and 45, when the costs of raising a family or buying a home could be making it more difficult for employees to save for retirement.
Maximizing the Match
While some employers may not see a problem with employees failing to take full advantage of the match, in that it means lower employer expenses in the short run, many studies point out the challenges that result when employees fail to save enough for a secure retirement. These consequences include older workers who would like to retire but feel they can't afford to do so, and financial stress that negatively affects workers' productivity and engagement, as well as their health and health care expenses.
Best practices among plan sponsors seeking to improve savings rates, according to Financial Engines, include:
• Automatically enrolling employees into the plan at the full-match rate, and automatically escalating savings rates over time.
• Encouraging employees to save at least enough to get the full match, and to proactively save more when they can.
• Designing a saver-friendly 401(k) plan and making high-quality independent advice available.
"By saving more today and taking advantage of the full employer match benefit, American employees can improve their chances of enjoying more secure retirements,” said Stein. "If they can’t afford to save enough to get the full match today, show the importance of increasing their savings rate when they receive their next raise and each raise thereafter."
Stephen Miller, CEBS, is an online editor/manager for SHRM. Follow him on Twitter @SHRMsmiller.