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401(k) Company Match on the Rise for Wrong Reasons

As companies shift away from defined-benefit retirement plans (i.e. we’ll pay you $x per year for the rest of your life) towards defined-contribution plans (i.e. you contribute x% per year) an inducement for employee participation is the company match.  It’s that free money 100% ROR of which we’d be foolish not to take advantage.

One of the first casualties of the financial panic of 2008 was the company match as employers hoarded cash.  Company matching contributions bottomed out at in 2009 at 3% of employee salaries.

According to this Vanguard report the pendulum is swinging the other way.  Company matching contributions will hit 4.7% of employee salaries this year up from 3.9% in 2015.

What’s behind the rise?  The corporate narrative is a twofold story – paternalism (helping employees save for retirement) and competitive compensation packages (the ability to attract and retain talent).

While there may be some truth to the explanation there’s an unspoken and far from altruistic reason companies are increasing 401(k) matching contributions.  They want to get rid of older employees.

Older employees are expensive!

  • They demand higher salaries than younger workers.
  • They are unhealthy relative to their younger counterparts.

Older workers stick around when retirement savings are insufficient.  To the extent increasing 401(k) matching contributions helps employees build their retirement nest eggs and, in turn, retire sooner than later companies can decrease their spending on insurance premiums and other health-related costs.

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