The Importance of the Employer Match - Putting the Cart Before the Horse

by Tom Allen and Mark Hebner - Friday, 11 September, 2015

Index Fund Advisors is a big fan of employer-sponsored retirement plans. Giving employees the opportunity to save for retirement by utilizing the incentives embedded in the U.S. Tax Code is of tremendous benefit to both the employee and the employer. We have written articles on this topic before, weighing in on the considerations that an employer must consider when adopting a retirement plan.

There has recently been a tremendous amount of attention given to the retirement plan space since the Department of Labor highlighted the large number of U.S. citizens who are currently underfunded for their retirement. Topics such as plan design, investments, and fees have all come under increased scrutiny. While many employers have decided to adopt certain features to their plan in order to increase employee participation and savings rates, there is still a complete disconnect in terms of participant investment education, which is ultimately the role of the plan sponsor. If they are unable to fulfill this role, they may delegate to a plan advisor, which is the route that IFA highly recommends.

We recently came across a research paper that addresses the importance of having an employer match as part of the plan design. According to the study, the employer-match can more than double the annual savings rate of participants, especially for those at moderate income levels and slightly further in their career versus employees fresh out of college or still very early on in their career. While this study is a reflection of the power of offering incentives in the plan design process, it is not enough. The study also mentioned that the average savings rate of plan participants in employer-sponsored retirement plans is 5.5%, which is a very alarming number since it is more likely to leave plan participants with too little resources to fund their retirement.

In no way are we trying to downplay the importance of offering an employer-match. The study we have referenced touts the fact that the incentive actually works. But, it doesn’t fulfill the point of having a retirement plan established in the first place. To give an analogy, think about designing a car. The point of the car is to be able to get you from Point A to Point B. Now let’s say that we upgraded the sound system and set of wheels on the car, but decided to completely leave the engine out of the car. Yes, you do have improved features in your car, but you cannot get from Point A to Point B.

The engine is this analogy would be a plan advisor who acts as a 3(38) Investment Manager and takes responsibility for educating clients on their proper savings rates. We can have all of the bells and whistles on a retirement plan, but at the end of the day, we need participants to be saving well beyond 5.5% per year. When employers sit down and want to start thinking about adopting a retirement plan for themselves and their employees, the first phone call they should make is to a plan advisor. This is ultimately the most valuable investment a plan sponsor can make since it will help get employees from Point A to Point B and allow them to fund a secure retirement. 

If you are interested in speaking to a Wealth Advisor about establishing a retirement plan, you may call 888-643-3133.

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