It’s that time of year again. With the turkey, stuffing and green bean casserole behind us, thousands of people are getting a jump-start on their New Year’s resolution by flooding into gyms and fitness centers. They (and I) are determined to transform our physical lives for the better – and we mean it this time! Some of us have already bought the new jeans that we’ll soon fit into. This time, it’s gonna be different. For sure.
Improving personal health and fitness is a mainstay among resolutions people make each year, evidenced by the hundreds of people who joined me at my local health club the weekend after Thanksgiving. But come February, why is it that the new gym goers have fallen by the wayside?
I’ll tell you why. It’s the same reason that we don’t stick to a budget or a savings plan. It’s called inertia.
The same forces that make it hard for us to stick with a fitness program are often the same forces that make it hard for us to save enough money and keep our spending under control. The good news for savers is that there is a way to make it easier to put away money for retirement. If your company offers a retirement plan that includes automatic enrollment and automatic escalation and your employees are participating, they’re well on their way to a more secure retirement with very minimal effort. (Unfortunately, the fitness center world hasn’t developed a similar program or magic pill to take the place of your sweat. Maybe someday!)
In addition to automatic enrollment and escalation, the employer match aspect is another great benefit commonly offered by companies. An employer match matches the employee’s contribution, up to a certain percent, as a way to encourage saving. And because employers continue moving away from defined benefit pension plans and to defined contribution retirement plans – a.k.a. 401(k) – employees tend to appreciate the employer match benefit. Many value it a lot. They see their company committing to investing in their future and encouraging them to save more. They take advantage of the “free contributions” and often save at least the match maximum, usually 3-4% to earn a 1% employer match for every percent they contribute.
However, we’re now seeing an unintended consequence of the employer match benefit. Employees who participate in a company match often see that 3-4% match as a signal that this is the minimum they should save. No surprise, many employees defer the match maximum (and not a penny more). Many experts suggest saving 11-15% of our income for retirement. At a minimum, we should strive to save at least 10% of our own money. And employees who are only saving the 3-4% of their own money are falling short of where they need to be.
Employers: there is a way to fix this. How? By stretching your match. Similar to how stretching is just as important as exercise, stretching your match can help improve the amount your employees save.
What does it mean to stretch your match? In simple terms, it means to adjust your offering so employees need to save more of their own money to take full advantage of your match. For example, if you offer a 100% match up to 3% of pay today, you can stretch your match by matching 50% up to 6% of pay. If you match 100% up to 4%, try stretching your match by matching 50% up to 8%.
In either case, employees will need to save more of their own money to take advantage of the match. By stretching your match, you provide employees the opportunity to stretch their savings! Getting employees to start at a 6-8% savings rate is much better than 3-4%. Layer in savings education and an automatic escalation feature and you’ll soon see the 6-8% move closer to that desired 10% number.
Some additional observations:
- It’s not much work. Given the large investment that the company match represents, you want to make sure it’s doing what you intended – helping your employees get on track for more secure retirement. For many of your employees who stop saving at the match maximum, they are unlikely on track.
- Employee reaction. The truth is your biggest ally. A strong communication plan explaining the reasoning for the change can be appreciated by employees concerned about saving enough for retirement. Many employees aren’t saving enough and many are stopping at the match. This is an industry best practice that is transforming retirement outcomes for workers as more employers adopt it.
- Affordability. While some employees may not be able to afford to save more than the 3-4% they’re saving today, the impact to the millions of workers who can is undeniable.
If you’re an employer and you’re interested in enhancing your current retirement plan in order to do more for your employees, fight the inertia and look at how plan design best practices, including a stretched match, can help.
Now, who wants to meet me at the treadmill?
This post was previously published on The Huffington Post on 12/13/2016.