The True Cost of a 401(k) Employer Match

Many companies are hesitant to start offering a 401(k) match program. Find out the truth behind matching employees’ 401(k) plan contributions.

For a startup or a small business, 401(k) matches can seem like a worthy but unattainable benefit. Even larger companies may hesitate to offer a match if they haven’t previously provided one. According to SHRM’s 2017 Employee Benefits report, of the 90 percent of employers who offered a traditional 401(k) plan, 76 percent provided an employer match. So, while some executives may believe that matching employees’ 401(k) contributions is unpopular or will not be appreciated by employees, the evidence signals that neither is necessarily true.

Believe it or not, employees tend to appreciate 401(k) matches.

Employees often respond differently when they have a 401(k) match. Last year, EBRI and Greenwald & Associates’ found that nearly 73 percent of workers said they were likely to save for retirement if their contributions were matched by their employer.

Let’s review the goals for employers offering a 401(k) match. First, matches are an important way employers can help employees stay on track for retirement; they can offer one way to build and extend an employee’s tenure with the company. Second, a match can add value to a 401(k) offering, helping to differentiate a total compensation package for job candidates. And these ideal outcomes aren’t just theory: A recent Betterment for Business study found that, for more than 45 percent of respondents, an employer’s decision to offer a 401(k) match was a factor in whether or not they took the job. That’s a relatively high demand for this type of benefit.

Question the value of matches, but ask the right questions.

Still, many employers tend to question the costs and benefits of matching  401(k) contributions. They often compare the value of a match to being more aggressive in their base salaries. And while making the right business move is critical, what many companies fail to evaluate effectively is the long-term cost of forgoing a match versus up-front costs of starting a match immediately.

What are these long-term costs of forgoing a 401(k) match? Just look toward employee replacement and retention costs.

When employers do not help facilitate employee retirement planning, they may be surprised by other costs that could rise, including higher relative salaries (beyond what might have been planned for), higher healthcare costs, or costs associated with loss of productivity.

If these claims feel far-fetched, just look toward the research.

According to a study from Prudential, every year an employee delays their retirement, it can cost their employer more than $50,000 due to a combination of factors including higher relative salaries, higher health care costs, younger employee retention through promotion, and several other elements. The storyline behind this find may be all too familiar to some employers: An older employee delays retirement due to insufficient savings; their productivity is hampered by health challenges, covered by employer-sponsored health insurance, and all the while, the company adapts to maintain productivity by hiring new people or advancing younger employees faster than anticipated. Eventually, when the older employer does retire, these costs only compound.

These additional costs can sneak up on employers, aren’t always planned for effectively, and yet, they have a real business impact.

For companies that may be less concerned with an aging employee population, forgoing matches can still contribute to rising retention and replacement costs due to the impact of financial distress on employee performance. In a SHRM survey measuring personal financial stress’s impact on employee performance, 47 percent of HR professionals noticed employees’ struggle with their “ability to focus on work.” Poor productivity not only costs the business in output, but it can inevitably lead to higher employee turnover, which, in turn, can lead to higher costs associated with retention and hiring.

401(k) matches may be your long-term competitive edge.

Offering a 401(k) can be a step in the right direction, but whether you’re looking for ways to increase plan participation, design a good 401(k) plan or just help your employees focus on financial wellness, consider looking toward investing in a 401(k)-match program. With the costs that could be awaiting companies who don’t provide a match, maybe you can’t afford not to.