Facebook’s parent company, Meta Platforms, and consulting firm KPMG U.S. are among a growing number of companies that are putting more money into their employees’ 401(k) retirement accounts, using another lever to attract and retain staff in the face of high turnover and competition for talent.
According to preliminary results of a survey of about 100 companies conducted last fall by investment-consulting firm Callan LLC, approximately 16% of large and midsize employers plan to increase their 401(k) contributions or reinstate a previously suspended match in 2022, while another 8% are considering such a move. The combined total is higher than the approximately 12% who took similar action in 2021.
Employers are facing a labor market in which workers are more mobile than ever before. In November, employers reported 10.6 million job openings, despite the fact that only 6.9 million people were unemployed. According to Labor Department data, a record 4.5 million U.S. workers quit their jobs that same month, most of whom took jobs with new employers.
“Employers are very concerned about the ‘Great Resignation,'” said Dave Stinnett, head of strategic retirement consulting at Vanguard Group, which manages 1,700 401(k)-style plans for businesses. “They have a lot of job openings, and filling them is taking longer.”
Companies competing for workers raise their pay, resulting in rapidly rising wages. Mr. Stinnett stated, “There is a realization that they need to do more” by improving benefits as well. Over the last six months, Vanguard has received more questions about increasing their match ratios than any other topic, he said.
Those who take action typically increase their match by 1% to 2% per year or make one-time contributions on top of the match, according to Mr. Stinnett. Others, he added, are allowing new hires to participate in the 401(k) plan immediately rather than after a waiting period, or are reducing the time an employee must work before taking ownership of the employer’s contributions made on their behalf.
After eliminating or freezing traditional pension plans that guaranteed employees a certain percentage of their salary in retirement, some employers are increasing their 401(k) match.
KPMG U.S. LLP replaced its 401(k) match with a contribution of 6% to 8% of employee pay, including bonuses, on January 1. The precise contribution varies depending on the worker’s age and tenure. The money is distributed to the firm’s more than 34,000 employees regardless of whether they contribute to the 401(k). Previously, the company matched 25% of up to 5% of eligible base pay contributed by an employee.
The increased 401(k) contributions, which are part of a larger initiative to improve employee benefits, began after the company froze its pension plan on December 31.
“In a tight labor market, we want to be in tune with the kinds of benefits we need to compete,” said Darren Burton, Chief Human Resources Officer. He went on to say that KPMG hires 6,000 people per year on average, and many of them believe that a 401(k) plan is better than a pension, which stops accruing benefits when an employee leaves the company.
The cost of the new benefits was not disclosed by the company.
Beginning on January 1, Facebook parent Meta Platforms Inc. increased its 401(k) match to a dollar for every dollar its employees contribute, up to $10,250 this year, or $13,500 for those 50 and older. This was an increase from the previous match of 50% of participant contributions up to 7% of pay, according to the company.
According to Vanguard, while companies are not required to make 401(k) contributions, the majority do. The most common approach among Vanguard clients is to match half of the money employees put into their accounts, up to 6% of their pay.
Early in the pandemic, a wave of companies suspended or reduced their 401(k) matching contributions in 2020. By the end of 2020, the economy had recovered, and many of those matches had been reintroduced.
According to Jamie McAllister, a Callan consultant who specializes in 401(k)s, roughly one-third of the companies surveyed by Callan that increased their contributions in 2021 reinstated matching contributions they had cut earlier in the pandemic.
Some employers stated that increasing or instituting a 401(k) match was another way to spread the benefits of higher profits due to an economy that was stronger than many business owners predicted in the early days of the pandemic.
Troy Lerner, CEO of Denver-based digital ad agency Booyah Advertising, doubled the match on the retirement plan he offers his roughly 100 employees in January 2021. When Covid-19 arrived in 2020, he laid off more than 20% of his employees, but quickly realized he had overcorrected, he said. When e-commerce took off and business picked up, he began calling employees back and aggressively hiring.
Prior to 2021, Booyah contributed up to 2.5 percent of an employee’s salary to a 401(k) account, or 50% of employee contributions up to 5 percent of the employee’s salary. Now, the company will invest up to 5% of the employee’s salary, matching 50% of the employee’s contributions up to 10% of the employee’s salary.
While retention has not been a major issue at Booyah, the company decided to raise the match in part due to “the dark cloud of headlines and people saying the Great Resignation is coming, and our expectation that people would be heading for the doors soon,” according to Mr. Lerner.
It also makes more sense from a tax standpoint than raising wages, he added.
Employees typically contribute a portion of their pretax earnings to a 401(k), lowering their taxable income. Generally, that money is not taxed until it is withdrawn in retirement.
Employer contributions to 401(k) plans are deductible on the employer’s federal income tax return, subject to certain limits.
“The first thing you should do with a dollar of salary is pay income tax,” Mr. Lerner explained. “Here’s a dollar with a tax benefit that can make a big difference later in life.” And it’s a gift you’ll probably get long after you’ve left Booyah, but that’s fine with me.”