The formula employers use for matching contributions in their 401(k) plans serves as a strong cue to workers for how much to contribute, according to an analysis by Principal.
When employers promise to match 100% up to 2% of an employee's contribution, the employee invests an average of 5.3%. When employers promise 50% up to 4% of pay, employees' average contributions rise slightly to 5.6%.
And when employers offer a match formula of 25% of up to 8% of pay, the average participant contribution jumps to 7%.
In each case, however, the employer is investing no more than 2% of a worker's salary.
Thus, Principal said, the design of the employer match can be a powerful motivator in boosting the amount of money participants put into their 401(k) retirement account.
"The data tells us that while the employer contribution stays at 2%, the higher target deferral in the match formula is spurring investors to save more," Barrie Christman, vice president of individual investor services at Principal, said in press release Nov. 30.
"This is significant because it shows that employers can incent better savings behavior without having to increase their costs."