But, how does specific design affect participant behaviors? Which way of offering a 2% of pay match gets participants to defer the most? The Principal Financial Corporation did an interesting analysis of this question. They considered these three matching schemes:
- 100% on the first 2% of pay deferred
- 50% on the first 4% of pay deferred
- 25% on the first 8% of pay deferred
In the first scenario, they found that the average participant deferral was 5.3% of pay. In the second scenario, it was 5.6% of pay, and in the third scenario, it was 7.0% of pay. And, for the three scenarios, total additions to participant accounts were 7.3%, 7.6%, and 8.8% of pay respectively. Interestingly, the third scenario costs the employers the least, but prepares participants best for retirement.
Excellent food for thought. You can read Principal's summary here: http://www.principal.com/about/news/2010/ris-match-stats113010.htm