Employers urged to consider 401(k) formula

Research from financial services provider Charles Schwab has highlighted the connection between how a company offers its 401(k) plan matching contribution and employee saving levels.

From 2004 to 2007, employees at companies with retirement plans serviced by Schwab were most likely to choose the plan's "match ceiling" as their deferral level in order to maximise the employer contributions they could receive. The match ceiling is the amount of salary employees need to defer into their plan in order to receive the maximum employer matching contribution.

For example, among plans serviced by Schwab in which employers offered a 6% matching contribution, 20% of employees selected the 6% match as their deferral rate - the most concentrated deferral level and more than double the next largest participant contribution percentage in these plans.

Dean Kohmann, vice president of Charles Schwab retirement plan services, said: "The formula employers use to match employee 401(k) contributions can vary widely, but because we've found that employees tend to choose the match ceiling as their savings rate, many employers are more carefully considering how to establish their match to help employees boost their savings."

According to Schwab data, the most common employer match formula is that the employer matches 50% of an employee's deferred salary up to 6% of compensation. It showed 36% of Schwab's plan sponsor clients have adopted a 6% match ceiling for their plan.

From 2004 to 2007, Schwab saw a steady increase in the number of employers instituting a matching feature in their plans, especially among larger employers. In plans with more than 2,500 participants, the number of employers providing a match has jumped from 78% in 2004 to 88% in 2007.

"The increase in the number of companies offering a 401(k) match is largely due to employers placing a greater emphasis on employee retirement readiness and increasing employee savings rates," said Kohmann.

The Schwab data indicates that employer match levels also increased in small and mid-sized plans. Across all sizes of plans included in the report, the level of employer match increased just over one percent from 3.15% in 2004 to 4.19% in 2007.