By Nicolas Heffernan
With tighter budgets and an increasingly competitive talent market forcing employers to look at their workplace retirement and savings plans, and their employer-matching contribution formula in particular, employers are finding innovative ways to remain competitive and on budget.
In the ultra-aggressive job market, workplace retirement and savings plans with an employer-matching contribution have become standard fare. “Workplace retirement savings plans can be designed in different ways that increase the savings made by the employee while also maintaining the same spend for the employer,” says Kim Duxbury, assistant vice president of product and research for group retirement services at Sun Life Financial. “So if an employer is sensitive to the financial implications of offering matching contributions, there are options that allow them to maintain a budget and still drive up savings by the employees.”
Instead of the usual dollar-for-dollar match, employers can develop plan rules to help spread the cost. For example, if the employer is prepared to provide a full match on the first five per cent of the employee’s earnings, the employer could structure the contribution formula where they match dollar for dollar on the first three per cent of the employee’s earnings but allow additional employee contributions of another four per cent of earnings and they match those contributions at only 50 cents on the dollar. The net result is the employer still meets their 5 per cent of pay objective, but the employee has effectively contributed more, thereby containing costs for the sponsor but also driving members to think more about their retirement savings.
“We call this type of plan design a tiered contribution approach,” says Duxbury. “When employers maintain their costs, the employees can contribute more and earn the full employer match. The combined result is more being saved in the employee’s account. This type of plan design is not new but we’re starting to see more clients using it as a way to manage their budget and encourage employees to save more for their future.”
While Sun Life’s report “Designed for Savings” shows the vast majority of employees are taking advantage of employer matching contributions, some employees are leaving money on the table.
“For the most part it’s not that they’re doing it intentionally, it’s inertia,” says Duxbury. “For many employees, it takes effort to get into a workplace savings plan and figure out the amount they want to contribute and then select the investments for their situation. Everyone is very busy and sometimes enrolling in their workplace plan is not high on the list of 'to dos.'”
Many employers do see the importance of their employees fully understanding and taking full advantage of their workplace plan and any matching contribution opportunities. “We’re going to see definite growth in this area in the sense that employers are paying attention to it and they really want their employees to take full advantage of their plan wherever they can,” said Duxbury.
Automatic solutions, like auto enrolment and auto escalation of contributions would make the process easier for the employee as well. But in the meantime employee education can be extremely effective. When Sun Life is able to make members aware they’re losing money there is a “very, very high adoption rate,” she says. “North of 80 per cent would not be uncommon. They’re really grateful to have this brought to their attention, not many people want to leave money on the table.”
In the end, a good matching-contribution formula boils down to balancing the competitiveness in the employer’s industry with affordability. “There really isn’t a one-size-fits-all approach,” says Duxbury. “You really have to think of factors such as employee attraction and retention strategies to get new employees to join an organization, and that speaks to the competitiveness of the employer’s industry.”