Why do companies match 401k contributions?

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BHawks87
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Why do companies match 401k contributions?

Post by BHawks87 » Wed Aug 01, 2012 6:57 pm

Is there some kind of tax advantage companies get for contributing to employees 401ks? Or do they do it to encourage employees to save for retirement so that when they are older and likely making high salaries they will be more likely to retire and allow room for young employees with lower salaries to move into their spots?

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uspeed
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Re: Why do companies match 401k contributions?

Post by uspeed » Wed Aug 01, 2012 7:09 pm

To bring a good talent into the company by showing this kind of perk, and they include as a part of total compensation.

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Re: Why do companies match 401k contributions?

Post by Langkawi » Wed Aug 01, 2012 7:30 pm

In addition, the ability of highly compensated employees to contribute to their 401(k) can be affected by the behavior of non-highly compensated employees. Encouraging the latter group to contribute more by using the matching incentive helps with the IRS discrimination tests.

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Re: Why do companies match 401k contributions?

Post by ks289 » Wed Aug 01, 2012 7:34 pm

uspeed wrote:To bring a good talent into the company by showing this kind of perk, and they include as a part of total compensation.
I agree this is the main reason.
Another reason (particularly in smaller businesses) is that employers themselves also benefit from the match to significantly increase their available tax deferred space.

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Re: Why do companies match 401k contributions?

Post by mikem » Wed Aug 01, 2012 8:36 pm

I believe it is less expensive for a company to fund a 401K match than it is to have a defined pension plan. A lot less admin costs as the 401K is handled by the fund advisory firm. I believe it is worthwhile noting that corporate balance sheets have improved significantly at the expense of the labor force.

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Re: Why do companies match 401k contributions?

Post by Watty » Wed Aug 01, 2012 10:32 pm

uspeed wrote:To bring a good talent into the company by showing this kind of perk, and they include as a part of total compensation.
In addition the match typically takes five years to fully vest so an employee that has been at the company for less than five years has an incentive to stay for until they are fully vested.

Don't forget that the executives that set the match likely also get the match in their 401k.

This also may not cost the company as much as it looks like on paper. Between people who don't even contribute enough to get the match or the ones that leave before they are fully vested I would not be surprised if a 3% match typically really costs half of that.

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Re: Why do companies match 401k contributions?

Post by save-early-often » Wed Aug 01, 2012 10:37 pm

When an employer makes a contribution to a qualifed retirement plan on behalf of its employees, the employer's contribution is not subject to payroll tax.

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Re: Why do companies match 401k contributions?

Post by Alan S. » Wed Aug 01, 2012 10:58 pm

The employer match is "one and done" and does not have to remain on the company books as a liability.

The company does not have to worry about market and interest rate induced contributions to adequately fund a DB plan. Further, I believe that maintaining a DB plan will now require substantially increased premium payments to fund the PBGC, which is close to exhausting it's funds.

It seems that DB plan reserves have been too tempting for companies to tap and/or not fund adequately when markets do not perform. Therefore, a DC plan provides the company with much more stability in their annual P&L statements and balance sheets.

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Re: Why do companies match 401k contributions?

Post by daytona084 » Thu Aug 02, 2012 12:07 am

mikem wrote:I believe it is less expensive for a company to fund a 401K match than it is to have a defined pension plan. A lot less admin costs as the 401K is handled by the fund advisory firm. I believe it is worthwhile noting that corporate balance sheets have improved significantly at the expense of the labor force.
Then how do you explain companies that have both 401k match and defined benefit pension plan, as my company has done ever since 401k plans began?

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Re: Why do companies match 401k contributions?

Post by lawman3966 » Thu Aug 02, 2012 1:34 am

It really depends upon which type of match/contribution you're referring to.

Matches based on the employee's contribution level are likely a combination incentive to save more, and a benefit in recruiting new people. It is a supplementary form of compensation. This type is usually vested over a period of six years or so, and can serve as an incentive for employees remain on the job longer.

Profit sharing, which I've received only rarely, is a discretionary reward to employees based on the level of success enjoyed by the employer in a given year.

Safe Harbor contributions are determined based on the employee's salary level, irrespective of contribution level. This isn't really a "match", but is nevertheless an employer contribution to the employee plan, which is usually completely vested once made. As I recall, this contribution is made to exempt the employer from scrutiny from the Department of Labor with regard to the level of participation of lower compensated employees, thus providing "harbor" from DOL harrassment.

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Re: Why do companies match 401k contributions?

Post by RadAudit » Thu Aug 02, 2012 6:09 am

wjwhitney wrote:Then how do you explain companies that have both 401k match and defined benefit pension plan, as my company has done ever since 401k plans began?
The accountants haven't run the numbers? :happy
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Re: Why do companies match 401k contributions?

Post by NAVigator » Thu Aug 02, 2012 6:27 am

uspeed wrote:To bring a good talent into the company by showing this kind of perk, and they include as a part of total compensation.
I disagree that companies use a good 401k to attract good talent. At the companies I worked for, not one advertised their 401k provisions. In fact, when asked about the details of the 401k plans such as matching, I was told they do not release that information until AFTER you agree to join the company with a signed document.

Companies might use the 401k to retain good talent, but in my experience, it has not be an incentive or even a factor in bringing people into the company.

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Re: Why do companies match 401k contributions?

Post by livesoft » Thu Aug 02, 2012 8:02 am

I agree that attracting talent may not be the professed reason. Folks should be looking at total compensation (salary, PTO, health benefits, FSA, 401(k), perks, etc). My employer contributes so that the HCE's can make maximum contributions. Otherwise, the HCE's would be severely limited in contributing to their 401(k) plans.

In essence, one could have higher salaries and no contribution; or a contribution and lower salaries. For the rank-and-file, they would would probably want higher salaries to spend and no contribution (seriously). The HCE's would rather defer more money to tax-advantaged plans.
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Re: Why do companies match 401k contributions?

Post by edge » Thu Aug 02, 2012 8:06 am

Watty wrote:
uspeed wrote:To bring a good talent into the company by showing this kind of perk, and they include as a part of total compensation.
In addition the match typically takes five years to fully vest so an employee that has been at the company for less than five years has an incentive to stay for until they are fully vested.

Don't forget that the executives that set the match likely also get the match in their 401k.

This also may not cost the company as much as it looks like on paper. Between people who don't even contribute enough to get the match or the ones that leave before they are fully vested I would not be surprised if a 3% match typically really costs half of that.
A lot of the above statements are false. For example, it is unlikely for most 'executives' to be elegible for any match. I have been ineligible for most of my career.

Companies have other types of plans for executives but the rules around these are not as nice as the 401k. All that being said, this comment is more around the false (and ridiculous) conclusion of 'companies have matches so executives can get them'.

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Re: Why do companies match 401k contributions?

Post by livesoft » Thu Aug 02, 2012 8:12 am

edge wrote:For example, it is unlikely for most 'executives' to be elegible for any match. I have been ineligible for most of my career.
I'm curious about that statement. Can you explain why as I have never seen that unless you are writing about limits to personal contributions due to be an HCE and plan failure if execs contribute too much? And yes, I know about deferred compensation plans.
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Re: Why do companies match 401k contributions?

Post by mikem » Thu Aug 02, 2012 8:14 am

wjwhitney wrote:
mikem wrote:I believe it is less expensive for a company to fund a 401K match than it is to have a defined pension plan. A lot less admin costs as the 401K is handled by the fund advisory firm. I believe it is worthwhile noting that corporate balance sheets have improved significantly at the expense of the labor force.
Then how do you explain companies that have both 401k match and defined benefit pension plan, as my company has done ever since 401k plans began?
If you have both, you should consider yourself fortunate. That is the exception,rather than the rule in corporate America.

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Re: Why do companies match 401k contributions?

Post by edge » Thu Aug 02, 2012 8:19 am

There can be no match on comp past 245k which means for most executives, whatever match they get is not material as most of their comp is not eligible. Most large companies have 'other' plans where executives can defer any % of their money and receive whatever match they would have gotten from the 401k (if it wasn't limited).

I definitely wrote the wrong thing with 'any'. My 401k match is so small I do some mental accounting as if it is not even there.
Last edited by edge on Thu Aug 02, 2012 8:27 am, edited 1 time in total.

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Re: Why do companies match 401k contributions?

Post by Tim_in_GA » Thu Aug 02, 2012 8:22 am

mikem wrote:
wjwhitney wrote:
mikem wrote:I believe it is less expensive for a company to fund a 401K match than it is to have a defined pension plan. A lot less admin costs as the 401K is handled by the fund advisory firm. I believe it is worthwhile noting that corporate balance sheets have improved significantly at the expense of the labor force.
Then how do you explain companies that have both 401k match and defined benefit pension plan, as my company has done ever since 401k plans began?
If you have both, you should consider yourself fortunate. That is the exception,rather than the rule in corporate America.
Definitely. I used to work for a large corporation and we had a DB plan, 401k, and a nice stock purchase plan. Wish I would have stayed there longer - I probably could have doubled my pension amount if I stayed until they froze the DB plan.

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Re: Why do companies match 401k contributions?

Post by downshiftme » Thu Aug 02, 2012 8:29 am

Our company added a match to the 401k program last year. We were finding it difficult to attract software developers and losing them to multiple offers where the other companies did have 401k matching programs. That may not have been the only reason, but it has helped in hiring.

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Re: Why do companies match 401k contributions?

Post by hand » Thu Aug 02, 2012 8:54 am

edge wrote:A lot of the above statements are false. For example, it is unlikely for most 'executives' to be elegible for any match. I have been ineligible for most of my career.

Companies have other types of plans for executives but the rules around these are not as nice as the 401k. All that being said, this comment is more around the false (and ridiculous) conclusion of 'companies have matches so executives can get them'.
I always understood executive eligibility was very industry dependent. Industries with a large number of low wage employees (manufacturing, hospitality) had regulatory or financial issues providing 401(k) matches to executives, while industries that tended towards higher paid employees (professional services) had an easier time meeting the non-discrimination testing criteria and / or could afford to make "safe harbor" matching contributions so discrimination is not an issue. I suspect your experience / anecdote is not representative.

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Re: Why do companies match 401k contributions?

Post by JamesSFO » Thu Aug 02, 2012 9:02 am

I've established 401K plans and matches--we definitely discussed bettering the ability of higher-ups to contribute and get some match to pull in more participation and $ from non HCEs.

As well as the other factors discussed here such as boosting comp for people, it is a nice recruitment tool, etc.

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Re: Why do companies match 401k contributions?

Post by bottlecap » Thu Aug 02, 2012 9:06 am

wjwhitney wrote:
mikem wrote:I believe it is less expensive for a company to fund a 401K match than it is to have a defined pension plan. A lot less admin costs as the 401K is handled by the fund advisory firm. I believe it is worthwhile noting that corporate balance sheets have improved significantly at the expense of the labor force.
Then how do you explain companies that have both 401k match and defined benefit pension plan, as my company has done ever since 401k plans began?
Your company decided to have both to attract different types of employees? BMW's are more expensive to maintain than Honda's, but some people still buy BMWs.

JT

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Re: Why do companies match 401k contributions?

Post by Harold » Thu Aug 02, 2012 9:21 am

bottlecap wrote:
wjwhitney wrote:
mikem wrote:I believe it is less expensive for a company to fund a 401K match than it is to have a defined pension plan. A lot less admin costs as the 401K is handled by the fund advisory firm. I believe it is worthwhile noting that corporate balance sheets have improved significantly at the expense of the labor force.
Then how do you explain companies that have both 401k match and defined benefit pension plan, as my company has done ever since 401k plans began?
Your company decided to have both to attract different types of employees? BMW's are more expensive to maintain than Honda's, but some people still buy BMWs.

JT
The main purpose of the defined benefit plan is for employers to manage their workforce by providing an orderly way to retire older employees. 401k plans do not perform that purpose effectively, but they do appeal to younger workers by providing a greater immediate benefit and portability if they have a shorter tenure of employment -- further, 401k plans are generally cheaper because they generally offer less of a benefit to employees. They serve different purposes, and companies may desire programs to achieve differing objectives.

About the 401k match, it's a corporate tax deduction that can enable corporations to better compensate highly paid employees -- and it helps them compete for employees in general.

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Re: Why do companies match 401k contributions?

Post by mikem » Thu Aug 02, 2012 1:39 pm

JamesSFO wrote:I've established 401K plans and matches--we definitely discussed bettering the ability of higher-ups to contribute and get some match to pull in more participation and $ from non HCEs.

As well as the other factors discussed here such as boosting comp for people, it is a nice recruitment tool, etc.
This is my experience as well. As an H/R manager, I was firmly told to push enrollment in the 401K by non highly compensated(hourly) new hires in order to allow higher compensated execs to get a higher match. Made me mad occasionally.

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Re: Why do companies match 401k contributions?

Post by ks289 » Thu Aug 02, 2012 1:57 pm

edge wrote:There can be no match on comp past 245k which means for most executives, whatever match they get is not material as most of their comp is not eligible. Most large companies have 'other' plans where executives can defer any % of their money and receive whatever match they would have gotten from the 401k (if it wasn't limited).

I definitely wrote the wrong thing with 'any'. My 401k match is so small I do some mental accounting as if it is not even there.
Our match is part of a Safe Harbor plan so I believe special top-heavy rules apply which are more lenient.

Wow, I did not realize that most executives earn so far in excess of $245,000 that $10,000 going into their 401k is a drop in the bucket! :greedy

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Re: Why do companies match 401k contributions?

Post by JDCPAEsq » Thu Aug 02, 2012 2:04 pm

Langkawi wrote:In addition, the ability of highly compensated employees to contribute to their 401(k) can be affected by the behavior of non-highly compensated employees. Encouraging the latter group to contribute more by using the matching incentive helps with the IRS discrimination tests.
This is the reason most companies offer a match. There must be certain participation by the lower paid employees for higher paid people to be eligible. Without the match, many would not participate.
John

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Re: Why do companies match 401k contributions?

Post by Wagnerjb » Thu Aug 02, 2012 4:53 pm

mikem wrote:If you have both, you should consider yourself fortunate.
Nothing "fortunate" about it. Livesoft said it well:
In essence, one could have higher salaries and no contribution; or a contribution and lower salaries.
Individual A earns $100 in cash salary, while B earns $100 in cash salary and also gets $15 in matching and/or pension plan contributions. Individual B is higher paid than A, simple as that. The fact that some of his total compensation comes in the form of pension or matching has nothing to do with fortune or luck.

Look at this another way. Individual A can put $15 of his salary in his personal retirement plan (IRA, taxable, whatever) and he is now on equal footing with the retirement plan of B. He now realizes that his net salary of $85 is less than the $100 cash salary of B.
Andy

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Re: Why do companies match 401k contributions?

Post by Jack » Thu Aug 02, 2012 5:08 pm

JDCPAEsq wrote:
Langkawi wrote:In addition, the ability of highly compensated employees to contribute to their 401(k) can be affected by the behavior of non-highly compensated employees. Encouraging the latter group to contribute more by using the matching incentive helps with the IRS discrimination tests.
This is the reason most companies offer a match. There must be certain participation by the lower paid employees for higher paid people to be eligible. Without the match, many would not participate.
This gets to the real reason for matching. It is not a benefit to the employee. It is just a method of forcing lower paid employees to spend their wages in a manner that benefits highly compensated employees.

401(k) plans were originally intended as a way for highly compensated employees to reduce their taxes. The IRS came to see these as abusive tax avoidance schemes and Congress introduced non-discrimination requirements starting in 1983. The non-discrimination rules are complex but basically they said that the average contribution percentage of highly compensated employees as a group cannot exceed the average contribution percentage of lower paid workers by more than two percentage points.

These non-discrimination rules were difficult to meet because the highly paid wanted to contribute the maximum percentage and the lower paid little or nothing. So they introduced the Safe Harbor 401(k) in 1996 that has much more relaxed discrimation rules. A typical minimum safe harbor is 100% matching of the first 3% of contributions and 50% match of the next 2%. Safe harbor matching contributions must be 100% vested.

Matching contributions have absolutely no tax advantage for the company. They are a deductible expense the same as regular wages. There is no difference between regular wages and matching contributions. They are not a gift to employees, rather they are a restriction on what employee can do with their wages in order to force a safe harbor that allows tax deferral for highly compensated employees. The company could just give the compensation directly to the employee as wages, allowing the employee the choice of whether to make a 401(k) contribution or not or the option of putting those wages into a tax deferred IRA with lower expenses. But instead, the employee has no choice. They must make a matching contribution in order to get their full compensation. This is not a benefit to employees; it is a restriction on employees. The company is not doing the typical employee any favors.

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Re: Why do companies match 401k contributions?

Post by mikem » Thu Aug 02, 2012 5:37 pm

Wagnerjb wrote:
mikem wrote:If you have both, you should consider yourself fortunate.
Nothing "fortunate" about it. Livesoft said it well:
In essence, one could have higher salaries and no contribution; or a contribution and lower salaries.
Individual A earns $100 in cash salary, while B earns $100 in cash salary and also gets $15 in matching and/or pension plan contributions. Individual B is higher paid than A, simple as that. The fact that some of his total compensation comes in the form of pension or matching has nothing to do with fortune or luck.

Look at this another way. Individual A can put $15 of his salary in his personal retirement plan (IRA, taxable, whatever) and he is now on equal footing with the retirement plan of B. He now realizes that his net salary of $85 is less than the $100 cash salary of B.
My point was that most employers offer one or the other, not both. If the OP has a pension plan(non contributory as some are) and a 401K with an employer match.....he is very lucky. His pension plan is probably worth the equivilent of 1 million in the bank paying him 4%/mo.

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Re: Why do companies match 401k contributions?

Post by tfb » Thu Aug 02, 2012 5:50 pm

How does it matter *why* companies match 401k contributions? Sounds like a non-actionable topic to me.
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Re: Why do companies match 401k contributions?

Post by JDCPAEsq » Thu Aug 02, 2012 6:25 pm

Jack wrote:They are not a gift to employees, rather they are a restriction on what employee can do with their wages in order to force a safe harbor that allows tax deferral for highly compensated employees. The company could just give the compensation directly to the employee as wages, allowing the employee the choice of whether to make a 401(k) contribution or not or the option of putting those wages into a tax deferred IRA with lower expenses. But instead, the employee has no choice. They must make a matching contribution in order to get their full compensation. This is not a benefit to employees; it is a restriction on employees. The company is not doing the typical employee any favors.
Jack - Thanks for elaborating on my earlier comment. Your knowledge of the history of 401(k)'s is much more in depth than mine, but I well remember the discrimination problems that arose in the early days of these plans. You are absolutely correct. There is really no other reason that employers establish this match other than to enable higher paid employees to participate by complying with the non-discrimination rules. However, I don't agree with your thinking that it is not a benefit to the employees. A little bit of incentive to save isn't going to hurt anyone.
John

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Re: Why do companies match 401k contributions?

Post by JDCPAEsq » Thu Aug 02, 2012 6:39 pm

tfb wrote:How does it matter *why* companies match 401k contributions? Sounds like a non-actionable topic to me.
Do you really feel this discussion has no merit or benefit to anyone? Might there not be employers or potential employers who are reading this thread?
John

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Re: Why do companies match 401k contributions?

Post by LadyGeek » Thu Aug 02, 2012 6:47 pm

(Update: I unlocked the thread.)

The idea is to have a productive discussion. Since you can't come to a meaningful conclusion, there's no point for the topic.
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Re: Why do companies match 401k contributions?

Post by LadyGeek » Thu Aug 02, 2012 7:08 pm

Someone PM'd me with a convincing argument why the thread should be unlocked. It's now unlocked.

HCE = Highly Compensated Employee
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Re: Why do companies match 401k contributions?

Post by Jack » Thu Aug 02, 2012 7:32 pm

JDCPAEsq wrote:However, I don't agree with your thinking that it is not a benefit to the employees. A little bit of incentive to save isn't going to hurt anyone.
Perhaps, but I would be inclined to respect the judgement of a person making $25,000 if they decided that they would be better off with an extra $50 in their paycheck to buy groceries for the kids.

Oh, by the way, I'd overlooked a small tax advantage to matching contributions -- no FICA -- if the employee is not already maxed out. Given the progressiveness of SS benefits, though, forced savings through FICA might better than forced savings through a 401(k) for low wage employees.

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Re: Why do companies match 401k contributions?

Post by edge » Thu Aug 02, 2012 7:40 pm

ks289 wrote:
edge wrote:There can be no match on comp past 245k which means for most executives, whatever match they get is not material as most of their comp is not eligible. Most large companies have 'other' plans where executives can defer any % of their money and receive whatever match they would have gotten from the 401k (if it wasn't limited).

I definitely wrote the wrong thing with 'any'. My 401k match is so small I do some mental accounting as if it is not even there.
Our match is part of a Safe Harbor plan so I believe special top-heavy rules apply which are more lenient.

Wow, I did not realize that most executives earn so far in excess of $245,000 that $10,000 going into their 401k is a drop in the bucket! :greedy
Well ya, the middle management 'director' types at large corps make around 250k. There is typically a huge jump between that and the lower level VP ranks and the pay scale beyond that increases exponentially as well. The top top guys at large corps, making millions of dollars per year, do not care about the HCE rule for themselves.

Safe Harbor is about getting around the HCE rule, it has nothing to do with the 245k matching limit. If HR has sessions talking about getting lower income employees to participate it is probably not JUST to benefit 'HCEs'/middle management. The plan gets messy if HCE rules go into affect during the course of a year and nobody ends up happy. Sure, not aggravating middle management is a nice side affect. Those guys have the unenviable position of being squeezed by both sides constantly.

But there is no grand conspiracy at the top of the house to make sure the CEO and his -2/-3s get their 10k 401k bonus. They just pay themselves more in other ways such as restricted stock grants, options, and the use of other types of deferred comp plans.

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Re: Why do companies match 401k contributions?

Post by Wagnerjb » Thu Aug 02, 2012 8:03 pm

mikem wrote:My point was that most employers offer one or the other, not both. If the OP has a pension plan(non contributory as some are) and a 401K with an employer match.....he is very lucky. His pension plan is probably worth the equivilent of 1 million in the bank paying him 4%/mo.
I disagree with the word "lucky". My employer offers a defined contribution pension plan (all contributions paid by employer), a 401-k matching plan, an annual bonus, free life insurance and competetitive medical benefits. I consider all of that to be part of my compensation and if I was to ever consider changing jobs I would look at the new company's total compensation package as well.

The people with pension plans plus 401k matching are not lucky. You might consider them well-paid in comparison to those without those benefits, but it has nothing to do with luck.

As I indicated earlier, anybody can replicate the pension benefit or the 401k matching on their own. Just take your salary and carve out the equivalent of those benefits. That is the only way to look at this rationally.

Best wishes.
Andy

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Re: Why do companies match 401k contributions?

Post by mikem » Fri Aug 03, 2012 9:35 am

My company participates in an industry wide salary survey in order to remain competitive in the marketplace with regard to recruiting. The survey (especially hourly employees) is solely based on base pay. The hourly rates are not "downward adjusted" to reflect the fact the companies offer a company match in the 401K or defined pension program. Nor is the hourly rate adjusted upward to compensate an employee for the fact the company does not offer a 401k or retirement plan. I do not understand your statement that the only way to rationally view this is to assume an employee can replicate a 401K by deducting the equivilent amount of a 401K contribution. The company match is money you did not start with. It's an incentive to save, which you are rewarded for.

I agree with you in that my use of the word "lucky" was the wrong word to use...luck has nothing to do with it. It was just easier to type than "more fortuitous than most".

Harold
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Re: Why do companies match 401k contributions?

Post by Harold » Fri Aug 03, 2012 10:05 am

Jack wrote:They are not a gift to employees, rather they are a restriction on what employee can do with their wages in order to force a safe harbor that allows tax deferral for highly compensated employees. The company could just give the compensation directly to the employee as wages, allowing the employee the choice of whether to make a 401(k) contribution or not or the option of putting those wages into a tax deferred IRA with lower expenses. But instead, the employee has no choice. They must make a matching contribution in order to get their full compensation. This is not a benefit to employees; it is a restriction on employees. The company is not doing the typical employee any favors.
Jack's observation is articulate and insightful. As is apparent from several posts that follow, most people can't fully conceptualize how money flows through corporations to employees -- and his is a refreshing way to look at it.

Two observations though: First, employers have a variety of objectives when offering compensation in various forms; one is focused on above, but others include being able to retire older workers, recruit younger workers, etc. Second, for those who already contribute the maximum, the match is a benefit in that it allows for greater tax-deferral (I suppose that's why the word "typical" was used, since most don't contribute anywhere near the maximum).

SJG
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Re: Why do companies match 401k contributions?

Post by SJG » Fri Aug 03, 2012 10:35 am

I hate to be politically incorrect here, but the reason we instituted our plan was that we like our employees. We want them to succeed and have comfortable retirements. DB plans are too expensive and risky (for both employer and employee) so we're left with a 401K.

The tax benefits and match are nice enough for the higher paid employees but I don't worry about them too much since they'll probably be fine anyway. It's the lower paid young 'uns that I want to help save. We all know that the $ you put away in your 20's are the ones that really add up.

The tax advantage doesn't mean spit to the lower paid guys. So, with the match, we essentially bribe them to save (100% vested on the day of contribution).

Paternalistic? sure. Against my libertarian instincts? yep.

Wrong?

Sue me.

SJG

Jack
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Re: Why do companies match 401k contributions?

Post by Jack » Fri Aug 03, 2012 11:13 am

SJG wrote:I hate to be politically incorrect here, but the reason we instituted our plan was that we like our employees. We want them to succeed and have comfortable retirements. DB plans are too expensive and risky (for both employer and employee) so we're left with a 401K.

The tax benefits and match are nice enough for the higher paid employees but I don't worry about them too much since they'll probably be fine anyway. It's the lower paid young 'uns that I want to help save. We all know that the $ you put away in your 20's are the ones that really add up.

The tax advantage doesn't mean spit to the lower paid guys. So, with the match, we essentially bribe them to save (100% vested on the day of contribution).

Paternalistic? sure. Against my libertarian instincts? yep.

Wrong?

Sue me.

SJG
Rather than bribery, one could call it hostage taking. You are holding part of their wage hostage unless they do what you want. Low wage employees might be better off getting the match as a regular wage since they have very low taxes. They would also get more credit for Social Security (highly paid employees do not) and have the option of saving in a low cost tax-deferred IRA. For low paid employees, the Social Security credits might be worth more than 401(k) tax deferral. The 401(k) primarily benefits higher paid workers who have maxed their IRA and have high tax rates. Forcing lower paid workers into the plan by holding their wage as hostage makes the benefit for highly paid employees possible.

kermit
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Re: Why do companies match 401k contributions?

Post by kermit » Fri Aug 03, 2012 11:19 am

It's part of the compensation package. Full stop. I have worked places that don't match and places that do. The places that don't aren't doing it because they don't want their employees to have a nice retirement. They aren't doing it because their employees have professed that they'd prefer compensation in other, potentially more lucrative, ways (e.g., stock options, bonuses, etc.)

Sibelius
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Re: Why do companies match 401k contributions?

Post by Sibelius » Thu Feb 19, 2015 10:09 pm

Hostage taking sounds very harsh to me. Every employer has to decide what package of salary and benefits to offer to their employees and for numerous reasons you have to treat all employees pretty much the same. Some want cash, others like retirement contributions. Every employee likes to avoid paying taxes so don't forget that important aspect. The employer has to decide what works best for their company, which I believe means understanding what has value to their employees and meets expectations for the labor market they operate in.

We operate a very small business (just seven employees, with two of them me and my wife) with professional employees so I don't pretend that it applies to other companies. When we started hiring employees I never considered not offering a retirement plan as it is expected in our industry. And as I did not want to deal with the administrative hassles and costs of a 401k, we fund a SEP-IRA and contribute six percent of salary for everyone. With the quirks of IRS regulations, we usually have to add another one percent at the end of the year to give everyone the same percentage as required by IRS regs for the SEP-IRA.

mnvalue
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Re: Why do companies match 401k contributions?

Post by mnvalue » Thu Feb 19, 2015 10:32 pm

I realize this isn't strictly about a match, but it's more-or-less the same.

My employer (with about 50 employees) contributes 25% of our salaries to a profit sharing plan. For the typical employee, this prevents them from shooting themselves in the foot by spending the larger cash wages that they'd receive otherwise. This is paternalistic, sure. Most, if not every last one, very much appreciate this. A number of us like to say, "We hire people that are good at math." because they see the value in this arrangement.

For the exceptions (typically HCEs) who want to contribute even more, this takes advantage of the IRS rules that establish different limits for employer and employee contributions. I can max my $18k in addition. If my employer was to pay me more in cash wages instead of doing the profit sharing contribution, I could not shelter that money. The effect of this additional tax sheltering increases the overall benefit of my compensation package. If I went somewhere else that paid an exactly equal number of dollars from the employer's pocket, it'd be worth a bit less to me. I have run the numbers on this in the past when comparing offers.

This, like employer-provided health insurance, is about following the encouragement offered by the tax code to maximize the employee's value for each employer dollar spent on them.

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