Matchmaker, Matchmaker, Make Me a Raise

Updated: September 1, 2015

Lots of people are leaving money on the table, turning down money their employers want to give them. They are giving up an opportunity to live better. Are you one of them?

A recent edition of the TIAA-CREF Institute’s Research Dialogue (you may have seen it at your local newsstand) has a thought-provoking assessment of how individuals respond to employers’ 401(k) matching contributions.1 The article’s authors are concerned with government policy implications– do people save more if their employers offer matching contributions, should Congress encourage employers to match more, etc.? We at Sensible Financial™ are much more interested in what the work suggests about how our clients can improve their lives through increased spending power. We suspect you are, too.

The study looks at a national sample of employees whose employers offer a wide variety of 401(k) type plans, and a broad range of matching opportunities. You may think that 401(k) plans are pretty standard. Not so!

Just over half of employers match employee contributions, and most of those that do have fixed (e.g., 50¢ on the dollar up to 3% of compensation) rather than variable (e.g., 50¢ on the dollar up to 1% of compensation, 25¢ on the next 1%) matches.

Companies that do match contribute widely varying percentages of compensation, a few are under 3%, while a very significant percentage matched 6% or even more.

The data are about 15 years old (the sample was drawn in 1992). The employees range in age from 51-61 – certainly older than the national average, but also closer to retirement, and arguably much more interested in saving than their younger colleagues. My experience as an economic researcher (admittedly dated now) suggests that the authors used very rich data – they know a lot about the people they studied (including Social Security earnings history) and the 401(k) plans they participate in (e.g., plan descriptions). They’ve used the data carefully (using “non-linear budget set estimation”), and they’ve learned a lot.

The most striking finding is that some people whose employers offer matching contributions don’t bother to participate in the plans. People who don’t participate at all leave an average employer match of 3.7% of their pay on the table – almost 4%! For $50,000 earners, that’s $1,850; for $100,000 earners, it’s $3,700. That’s not chicken feed – it’s a couple of monthly rent checks, or mortgage payments, or several car payments. For those that earn even more, well, we’ll leave the math to you.

Even those who do take advantage of the match often don’t take full advantage. They leave an average of 1% of the employer’s offered match unused, in effect saying to the employer, “no thanks, keep your $500 or $1,000, (or more), I don’t want or need it.”

The researchers do find that larger matches from employers encourage more saving, but not dollar for dollar. That is, larger employer matches encourage more saving than smaller matches do, but also leave larger unused matches.

So, the bottom line – there are a lot of employer dollars out there ripe for the taking, and people are leaving them. It is often said that money doesn’t grow on trees, but here’s a case where it does, and people are refusing to pick it. Why?

The authors don’t address that question, but we’ll take a swing at it. We can think of three reasons – none of them good – and we’ll tell you why:

Here’s what you can do to be sure to scoop all that money off the table:

If in doubt, talk with a trusted financial advisor about these options and see if increasing your match is feasible. A professional financial advisor will be able to decipher difficult to read employer plan documents and help to ensure that you’re reaping the most from your employee benefits. If you have questions about your employee 401(k) benefit or employer contribution match, give us a call at 617-444-8677, we’d be happy to discuss your options and help you select a plan/contribution option that’s right for you.