Dollar cap match formulas could distribute employer contributions to 401(k)s more equitably than other common match formulas, according to a new report by Vanguard Inc.

The report analyzed more than 1,300 large employer-sponsored plans that are record-kept by Vanguard between 2013 and 2022. It found among two-thirds of plans, employer contributions exacerbate pay inequity and 44 per cent of dollars accrued to the top 20 per cent of earners.

Employer contributions are less equally distributed than income; indeed, the top 20 per cent of earners received an 11 per cent larger share of employer contributions than income, while those in the bottom pay quintile received a 29 per cent smaller share of matching dollars than income.

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Many common formulas, including safe harbour designs, disproportionately benefit higher-income employees, said the report, noting six of the 10 most common match formulas are safe harbour designs.

It also noted employee saving rates vary little across plans with different levels of employer matches. The majority (59 per cent) of employer contributions accrued to the 41 per cent of employees who saved more than the match cap, suggesting they would’ve saved just as much without the match. Just 13 per cent of workers contribute exactly at the maximum match level and these worked received only 17 per cent of employer contributions.

Dollar cap match formulas, used in just four per cent of plans that were analyzed in the report, distribute employer contributions and may also serve as a potentially useful tool for containing contribution costs without necessarily reducing savings, because the high-income workers most likely affected are also those most likely to have been saving above the matching cap to begin with.

“While one size may not fit all and no single formula is a clear winner, the criteria of equity, efficiency and cost can help plan sponsors better use their employer contribution budgets. For example, employers could prioritize plan features that promote savings for lower-income workers, such as auto-enrolment, a higher default savings rate or immediate eligibility and vesting. Dollar caps could help pay for such features.”

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