PLANADVISER - July/August 2018 - 49

to help encourage better saving by participants. "
Blanchett continues, " If plan sponsors want participants
to have a successful retirement, the all-in savings has to
be at least 15%. But if the company match is only up to 4%
of salary deferrals, sponsors will see [approximately] a 4%
savings rate by employees. "
Kathleen A. Kelly, managing partner at Compass Financial
Partners in Greensboro, North Carolina, says stretching
the match is a reasonable plan design consideration to
incentivize the right behavior. " Plan sponsors should align
the message of what they think employees should save to
what they will match, " she says.
Masterson suggests that to successfully sell the concept
of the stretch match to their clients, advisers should make
sure the client understands it fully. Because Hendrick
Motorsports' match formula was atypical-not the usual
25% or 50% of a certain amount of deferrals-it took participants
a while to grasp why the company made the change.
She admits that, when she first came to the company-the
stretch match formula was implemented a couple of months
before her hire-she also thought it was odd.
" As the administrator of the plan, you have to get your
head around it, " she says. " I had to follow the same process
as I did with employees to understand how it works and how
it benefits them. I had to put my plan participant hat on, and
that helped with how I educated participants. " Masterson
spent considerable one-on-one time doing the math with
managers as well as with employees.
Not 'Being Cheap' but 'Doing More'
Blanchett concurs that implementing a stretch match
formula involves substantial communication to explain to
participants why the plan sponsor is making the change.
" Participants may perceive this as the plan sponsor taking
away a benefit, " he says. " For example, moving from matching
[a higher amount up to] 4% to matching [a lower amount up
to] 8% may make some participants think the plan sponsor
is being cheap. In addition, some participants may not be
able to contribute the 8%, " he says. " Tell plan sponsors to
convey to employees that they are asking participants to do
more, and the plan sponsor will do more to help them. "
In Hendrick's case, Masterson notes, showing the dollar
value of the company match made a difference, too: In
stretching the match, Hendrick was offering participants
more money.
According to Kelly, " As with everything we do, it starts
with providing data [and] then looking at a particular
client's objectives, what it has in place, and whether these
two things align. " She adds that it is important to get a good
understanding of work force demographics. " It's very easy to
look at a stretch match as a given, but with some clients-for
example, those with hourly-based wages or lower average
compensation among the work force-the plan sponsor
doesn't want a stretch match to have a negative impact on
participants who can't save at an 8% or 10% deferral rate, "
she says. " For other plans, advisers can make the case to
incentivize employees to save by stretching the match. "
When the stretch is so high that meeting it is out of
reach, this is a disincentive, Blanchett agrees. " If the match
moves beyond 10% of deferrals, it will be hard for many
participants to save that, " he says.
The Match Plus Other Features
Blanchett says he often sees plan sponsors tie their match
formula to the default deferral percentage in automatic
enrollment. The largest proportion (40.7%) of sponsors that
use that feature set the default deferral rate at 3%, the 2017
PLANSPONSOR DC Survey found. Only 17.6% use a default
of 6%, and just 7.7% use a default greater than 6%.
As an example, Blanchett notes that the most common
matching formula is 50% of up to 6% of salary deferred,
but this gets participants only to an all-in savings rate of
9%. " Setting a higher default percent and linking the match
formula to that is definitely worth a conversation with plan
sponsors, " he says.
Some plan sponsors want participants to save beyond the
match, but the formula is not incentivizing that behavior,
Kelly says. Some plan sponsors have a lower default contribution
percentage, but use automatic deferral escalation
to get participants to save up to the full match. " And, with
the power of inertia, even auto-escalating to a savings rate
above the match formula means participants are unlikely to
opt out, " she suggests.
She cites the following to show how to ease plan sponsors
into a better stretch match formula. " We have clients
we worked with through the financial crisis that had to
suspend their DC plan match. When the match was reinstated,
it gave us a great opportunity to talk about changing
the formula, " she says. Compass advisers started to lay
the groundwork by suggesting smaller matches for higher
deferral amounts-for instance, matching 10% up to 10%
of salary deferrals-but as sponsor clients' financials
improved, they could move to matching 20% of up to 10%.
" It was all dependent on the client's willingness to commit
to additional dollars, " she says.
Blanchett says he understands that sponsors worry about
DC plan budgets, but a stretch match can be done in an effective
way that adds nothing to sponsors' costs. In addition, it
will be encouraging employees to save successfully.
-Rebecca Moore
KEY TAKEAWAYS
* Because the company match often prompts participants
to save the target percentage, a stretch match formula
can incentivize them to save more.
* Educating sponsors and participants is important to get
a stretch match program up and running and to ensure
its success.
* The stretch match formula can be combined with autoenrollment
and auto-deferral escalation to get participants
to save to the match amount or beyond.
planadviser.com july-august 2018 | 49
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