Employers competing to fill empty positions with the most talented candidates at a time of historically low unemployment are turning to a once overlooked benefit: the 401(k) match.
Workers value that perk more than cash, so much so that a dollar in 401(k) contributions is twice as effective at luring talent as a dollar in wages, according to new research published this week by the National Bureau of Economic Research.
While younger workers appear to be swayed by 401(k) matches, the benefit is more pronounced among higher-income, older workers, who value employer contributions as much as four times more than regular compensation, the research shows.
“We’ve seen a general trend of employers really taking a look at their match and match characteristics over the past few years,” said Gordon Tewell, principal at Innovest Portfolio Solutions, an RIA overseeing about $35 billion in defined-contribution assets across roughly 200 plans.
The study found “across three distinct methods that most workers exhibit willingness to pay for both the intensive and extensive margin of DC retirement plans,” the authors wrote.
The research methods included building a data set using figures from millions of online job postings and resumes and retirement plan data from the Department of Labor. The researchers also conducted an online experimental survey asking workers how much compensation they would give up for access to a 401(k) and for higher levels of employer contributions. Another aspect of the study involved designing “an on-the-job search model [that] estimates worker valuations.”
The survey found that people were willing to forgo 3.4% of wages just to have access to a 401(k), as well as an additional 1.6% in wages for each percentage point of an employer match.
The job-search model also supported that, finding that 90% of workers appear willing to give up some level of compensation to get a 401(k), and 75% would do so for higher employer contributions to their retirement accounts.
“The results suggest increasing retirement contributions has a much larger (2.5 times) effect on firm recruiting success than increasing wages,” the authors wrote. “However, doing so disproportionately benefits higher income workers who place a higher value on these contributions.”
Not all employers have been willing to increase 401(k) contributions, but there has been more interest in certain industries, such as professional services, where engineering firms, for example, have done so to be more competitive in hiring, Tewell said. Some employers also want to help ensure their workers can retire, he noted.
“It’s part of the broader trend in the industry to think about ensuring accumulation of assets is strong over the course of somebody’s career, so they can retire in a manner they want,” he said.
Clients have also made their 401(k)s more accessible by reducing the time before workers are eligible to participate and making the vesting time frames shorter, Tewell said. Another strategy has been using a “stretch match,” which encourages workers to contribute as much as 12% of their pay to qualify for the full employer contribution.
Data for 2021 — the most recent year for which 401(k) figures from the DOL are available — show the average employer contribution was equivalent to 5.6% of workers’ wages, according to a report late last year from the Plan Sponsor Council of America. Most employers made contributions to accounts during the year, with 13% raising profit-sharing contributions and 5% increasing the matches they provide. Further, 44% of companies making contributions had immediate vesting for workers, up from 41% in 2020, PSCA found.
In addition to the benefits of employer contributions and tax deferral that can make 401(k)s attractive, participants also usually have access to low-cost share classes of mutual funds and other investment vehicles, a report this week from the Investment Company Institute noted.
Since 2000, average asset-weighted fees for the mutual funds within 401(k)s have fallen by about half, while the simple average for fees across the broader market of mutual funds has not decreased as significantly. For hybrid funds, which include a mix of stocks and bonds, the average asset-weighted fee in 401(k)s was 42 basis points in 2022, compared with an overall average of 118 bps, the ICI found.