You want to attract the best talent possible and you want to keep your current employees happy, so you put together the best compensation package you can. You might think a 401k with employer matching is an essential part of that package. But it turns out a financial wellness bonus might be more attractive (and beneficial) to your workforce. Here’s why.  

What is Employer Retirement Contribution Matching?

Employer retirement contribution matching is when an employer offers to match employees’ retirement plan contributions up to a certain percentage of their annual salary. Employer matching can be structured differently at different companies but here are the three most common ways it functions:

  1. Simple Match. With simple matching, the employer matches employee contributions up to a fixed percentage of the employees’ annual salary. Example: Employer matches 50% of employees’ contributions up to 6% of their annual salary, meaning the employer will contribute a maximum of 3% of the employees’ annual salary each year.
  2. Tiered Match Formula. If you offer this type of matching structure, you match different levels of contributions at different rates. For example, you might match 100% of employees contributions up to 4% of their salary and then match 50% of their contributions up to the next 2% of their salary (for a total max matched contribution amount of 5% of their annual salary).
  3. Max Dollar Match. In this type of structure, employers match employees’ contributions up to a certain dollar threshold. For example, an employer might match 50% of employee contributions up to $1,000.

A less common employer retirement plan contribution structure is a blanket contribution to employees’ accounts regardless of employee contribution activity. Meaning, every employee would get the same retirement plan contribution from the company (this might be a dollar amount or percentage of annual salary) regardless of whether or not they contributed even $1 of their own money.

The Pros and Cons of  Employer Retirement Plan Matching

Pro #1: Employees tend to save more. 

A recent study conducted by Brightscope and the Investment Company Institute (ICI) found that employees whose employers offered at least some level of contribution matching, ended up contributing more of their own money to their retirement account. The more money people save, the greater the employer match, and the faster those savings grow over time. 

Pro #2: It can be a good recruiting tool. The general perception of retirement plan contribution matching is positive (people see it as “free money”), so employers can use this benefit to attract and retain talent. If the matching is on a vesting schedule, this can also incentivize employees to stay at the company longer than they might normally in order to leave with 100% of their employer-contributed savings.

Con #1: Employer contributions might not be available to employees right away. Many employers require employees to work for the company for a year before they’re eligible for contribution matching. If employer contributions are on a vesting schedule, then employees don’t fully own said contributions until the vesting is complete. That means if your vesting schedule is five years, every year an employee works for the company they own an additional 20% of the employer contributions. So if they stay with the company for two years, 40% of their company’s contributions are “released” into their 401k upon their departure. 

Con #2: Employer matching can lead to a lack of portability of retirement savings. As we said above, employees whose employers offer retirement plan contribution matching tend to save more. Which is great. However, 401k savings aren’t portable. So when an employee leaves the company, they no longer have the ability to contribute to the account. They must either roll it over to a new retirement account (and the fees for doing so could wipe out any gains made), leave it where it is and keep track of it along with any other accounts they have, or cash it out and pay a hefty penalty. 

Con #3: It can reduce employers’ flexibility when it comes to compensation. When employers put together their 401k plan, they must announce their intended employee contribution matching structure. This structure must be the same for all eligible employees. That means employers have limited flexibility in terms of the types of compensation they can offer employees and the way they reward good work product and valuable contributions to the company.

How Icon can Help Solve the Problems with Employer Retirement Plan Matching 

Icon’s retirement plan is a payroll IRA meaning contributions are made through payroll. So by offering an Icon plan instead of a 401k, employers make it easy for employees to save while solving the portability problem.

As a reward for contributing to their account, employers can offer matching in the form of a “financial wellness” bonus. This is actually a more popular form of compensation as 55% of current 401k participants would rather have a cash bonus as opposed to employer matching.

Whether you’re weighing the benefits of employer retirement plan matching as an employer or as a current or potential employee, it’s important to consider all aspects of the 401k before making your decision.

If you’re ready for a new kind of retirement account that actually helps people save without the headache and risk of a 401k, Icon is here to help.

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