Maximizing the match
in DC plans
IRA insights
Vanguard research note | March 2015
n A
t a given point in time, one-third of Vanguard participants contribute below their plan-specific employer
match level. This figure declines to 18% of participants after accounting for plans with an automaticincrease design feature (and assuming no opt-out behavior by participants). In automatic enrollment
plans, 55% are contributing below the match initially, versus 21% after three years.
n These results highlight the general need for targeted match-level messaging and for stronger default
contribution rates in automatic enrollment plans.
Introduction
In this paper we examine the effect of plan sponsor
design decisions on participant decisions to maximize
their employer matching contributions. Our data set
includes 1.1 million plan participants in 667 plans for
calendar year 2012 (Figure 1)1.
An important factor influencing participant behavior is
the default choice architecture of the plan: whether a
participant entered the plan under automatic enrollment
or voluntary enrollment. At a participant level, 26% of
the participants in our data set had been subjected to
automatic enrollment; the remainder, to voluntary
enrollment.
Figure 1. Study data sample
Number of plans
Fraction of plans
Number of participants*
Fraction of total participants
Voluntary
enrollment
Automatic
enrollment
All
379
43%
776,927
74%
288
57%
278,872
26%
667
100%
1,055,799
100%
74%
7.3%
6.0%
87%
5.1%
4.4%
77%
6.7%
6.0%
48.0
11.7
$70,354
37.3
2.3
$51,151
45.5
7.9
$66,036
Plan characteristics
Participation rate
Average deferral rate
Median deferral rate
Participant characteristics
Median age
Median tenure
Median income
* Individual participants are categorized based on whether they have been subjected to voluntary or automatic enrollment. Participants who were hired prior to the adoption of automatic
enrollment are categorized as having been subjected to voluntary enrollment. In situations where there has been a plan sweep, those participants who entered the plan under the sweep
are categorized as subjected to automatic enrollment.
Source: Vanguard, 2015.
1 Our analysis is based on a subset of Vanguard’s 3.4 million defined contribution (DC) plan participant population. It includes only plans for which we have completed compliance testing in 2012.
In addition, we restrict our sample to plans that have standard match formulas such as “$.50 per dollar on the first 6% of pay” or “$1.00 per dollar on first 3% of pay and $0.50 per dollar on next
2% of pay.” Plans with a dollar cap on the level of match and plans with variable formulas based on age and/or tenure are excluded from this analysis. We have also excluded plans with employer
matching contribution that exceed 10% of wages and plans with no employer matching contributions.
1
The two participant populations differ significantly.
Participants subjected to voluntary enrollment had a
median tenure of 11.7 years—five times longer than
the 2.3 year median tenure of participants subjected to
automatic enrollment. This is due to the fact that many
plans apply automatic enrollment only to new hires.
Voluntary enrollment participants had a median age of
48.0 years—slightly more than 10 years older than the
median age of 37.3 years among automatic enrollment
participants. Voluntary enrollment participants also had
higher median income than automatic enrollment
participants.
behavior assuming that three future automatic increases
take place (only for participants enrolled in the feature at
year-end 2012 and using their elected increase rate).
We project that only 17% of voluntary enrollment
participants and 21% of automatic enrollment participants
(18% across both types of plans) would be below the
match level after three years—a significant improvement over the initial levels (Figure 2, right panel).
This represents an estimate of the pure plan design
effect, and does not account for participants opting out
of the plan or the automatic-increase feature over time,
which a very small fraction will do.2
The impact of design and turnover
Maximizing the employer match
In calendar year 2012, 27% of participants in voluntary
enrollment plans were contributing below the match
level, compared with 55% of participants in automatic
enrollment plans enrolled by default (Figure 2, left
panel). The difference is attributable to the low default
contribution rates set under automatic enrollment by
employers. Across both plan types, about one-third of
participants were contributing below the match level.
Some plan sponsors have introduced automatic-increase
features to raise plan contribution rates over time.
In our sample, 57% of the participants in voluntary
enrollment plan designs have access to an automaticincrease feature, and 23% of those offered annual
increases signed up for the feature. The result: 13% of
voluntary enrollment participants were actually enrolled
in annual increases. Within automatic enrollment plan
designs, more than 9 in 10 participants are in designs
with an automatic increase feature.
Hypothetically, what might happen to match-level
contribution behavior assuming these automatic-increase
features take effect over time? We estimate deferral
We chose a three-year period for our projection because
about two-thirds of automatically enrolled participants
below the match are in an automatic increase feature
that would raise them to the match level in three years
(Figure 3). We also selected a three-year period because
about half of automatically enrolled participants hired by
a plan sponsor in our sample leave their employer within
three years (Figure 4). Of new enrollees, slightly more
than 40% leave voluntary enrollment plans and nearly
half leave automatic enrollment plans within three years.
Employer costs
Employers have two potential mechanisms for raising
the fraction of participants contributing at the match level:
targeted messaging campaigns and automatic enrollment
plan design changes that raise the default contribution
rate. What might be the costs to employers for
encouraging additional match-level contributors?
Across our sample, about one-third of participants enroll
(or are enrolled) below the match level. We calculated
the incremental cost of having participants move to
the match level given each participant’s income,
Figure 2. Deferral rates and match levels
Fraction of participants deferring at, above or below plan-specific match level
After three years of annual increases*
Calendar year 2012
27%
46%
52%
18%
20%
21%
24%
55%
34%
27%
Voluntary
enrollment
Below match rate
59%
Automatic
enrollment
At match rate
All
46%
33%
55%
27%
17%
21%
18%
Voluntary
enrollment
Automatic
enrollment
All
Above match rate
* For participants in plans with automatic enrollment designs, annual increases are assumed only for those plans where the feature is offered and the participant has not opted out of the feature.
For participants in voluntary enrollment designs, annual increases are assumed only for participants who have elected the option. The three-year projection assumes participants enrolled in
annual increases do not opt-out.
Source: Vanguard, 2015.
2 For an analysis of automatic plan design features over time see Jeffrey W. Clark, Stephen P. Utkus, and Jean A. Young, 2015, Automatic enrollment: The power of the default, Vanguard Center
for Retirement Research, institutional.vangaurd.com.
2
Figure 4. Participant 2012 turnover rate within three
years of tenure
Figure 3. Years to match level in automatic
enrollment design
Automatically enrolled
participants deferring below
the match level
Number of years of 1%
increases to attain match level
1
2
3
4
5
Percentage
Cumulative
percentage
18%
20
25
13
8
18%
38
63
76
84
year
years
years
years
or more years
Participant required to override
default deferral rate to attain
match level
16
100
Source: Vanguard, 2015.
49%
50%
46%
41%
0%
Voluntary
enrollment
Automatic
enrollment
All
Source: Vanguard, 2015.
current deferral rate, and the match design to which
the participant is subject to. In voluntary enrollment plans,
where the median income of participants saving below
the match is $57,300, the additional match cost of having
participants contribute at the full match level is 8% of
the match cost currently incurred by these employers
(Figure 5). In automatic enrollment plans, the median
income of new enrollees is lower, at $40,700, but the
default deferral rate for new enrollees tends to also be
lower, so the additional match cost of having participants
contribute at the full match level is 18% of the match cost
currently incurred by these employers. However, some of
this additional match cost would be incurred automatically
in the future because of the automatic-increase feature.
The incremental match cost is less than plan sponsors
might expect. This is due to the fact that higher-wage
employees are more likely to enroll at a deferral level
where the match is maximized (or higher), and when
they are subject to an automatic enrollment design they
are more likely to override the default and select a higher
deferral rate. For clients seeking to mitigate the effects
of these additional match costs, up to half of this
incremental cost could potentially be offset by adopting
a three-year cliff vesting schedule, given the turnover
statistics noted earlier.
Enrollment type and match generosity
There is wide variation in employer matching formulas.3
Some analysts have suggested that employer matches
in automatic enrollment plan designs are less generous
than those in voluntary enrollment designs.4 However,
the overall generosity of matches among the voluntary
and automatic enrollment plans in our sample is strikingly
similar (Figure 6, page 4).
In half the plans in our sample, participants needed to
defer 6% in order to receive the full employer match.
The median match value in voluntary enrollment designs
was 3% of wages—reflecting the most common match
formula we see, namely $0.50 per $1.00 on the first 6%.
The median value of the employer matching contribution
in automatic enrollment designs where a 6% deferral rate
is required to receive the full match was higher at 3.5%.
This reflects one automatic enrollment safe harbor design
Figure 5. Incremental match cost Median participant income
Below match rate
At match rate
Above match rate
Voluntary
enrollment
Automatic
enrollment
All
$57,300
$64,600
$81,300
$40,700
$55,000
$68,600
$51,900
$62,400
$79,500
8%
59%
5%
18%
51%
9%
10%
54%
5%
Incremental match cost assuming participants saving
below the match now save at the match level
Incremental cost of moving participants to match
level as a percentage of current match cost
Participant 3-year retention rate
Incremental total match cost with 3-year cliff vesting
Source: Vanguard, 2015.
3 At Vanguard, we recordkeep over 225 unique match formulas for plans on our direct full-service recordkeeping platform.
4 See Barbara A. Butrica and Nadia S. Karamecheva, 2013, How does auto-enrollment relate to the employer match and total compensation, Center for Retirement Research at Boston College,
crr.bc.edu.
3
Figure 6. Match value when match is maximized
5.0%
4.0%
4.0% 4.0%
4.0% 4.0%
Value of match
3.5%
3.0% 3.0%
3.0%
2.5%
0.0%
1%–3%
5%
4%
6%
7%+
Deferral rate to maximize match
Percentage
of plans
5% 4%
Voluntary enrollment median
9% 4%
12% 8%
25% 25%
5% 3%
Automatic enrollment median
Source: Vanguard, 2015.
available to plan sponsors. In match structures requiring
a participant deferral of 4% to receive the full employer
match, participants in automatic enrollment designs
receive more generous matches as well.
Implications
Efforts to maximize match-level contributions by
participants are influenced by the type of plan design,
the workforce turnover of employees (particularly new
hires), as well as differences in workforce incomes.
In voluntary enrollment plans, participant decisions on
contributions are often anchored on the match structure
or zero (not participating). Fewer eligible employees
participate in voluntary enrollment plans, but a higher
proportion who do participate elect deferral rates at or
above the match level. In automatic enrollment plans,
participation rates are higher due to the opt-out nature of
the enrollment decision. Contribution rates are anchored
on the initial default rate, which is typically low and set
below the match level, plus any automatic-increase
feature.
One simple strategy to boost match-maximizing behavior
would be to raise initial default deferral rates in automatic
enrollment plans. We estimated that costs would rise on
average by about one-fifth, although half of this cost could
be mitigated through use of a three-year cliff vesting
schedule, given employee turnover. Another approach
is to target specific messages regarding the matchmaximizing opportunity to participants below the
match level.
Connect with Vanguard® > vanguard.com > global.vanguard.com (non-U.S. investors)
Vanguard research authors
Jeffrey W. Clark
Stephen P. Utkus
Jean A. Young
Vanguard Research
P.O. Box 2900
Valley Forge, PA 19482-2900
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