Skip to main content

You are here

Advertisement

Annual 401(k) Matches: Pros and Cons

Many employers match a certain percentage of what their employees defer into their 401(k)s. In the wake of the recent debacle at AOL, Investment News looked at the advantages and disadvantages of providing the match on an annual basis.

Annual matches can benefit employees because they: 

  • protect employees from short-term market downturns that affect 401(k) accounts heavily invested in stocks and that occur well before the match is made;
  • can be used to encourage beneficial employee behaviors; and

  • help the employer protect its profitability — and therefore its ability to provide for employees.

Annual matches can benefit employers because they: 

  • give employees an incentive to stay with the employer, giving the employer the benefit of longer tenure;
  • help an employer budget more precisely by allowing it to adjust the match to its year-end financial performance;
  • simplify administration and record keeping regarding the 401(k) and the match; and

  • give an employer a new way to use the match to reward certain employee behaviors.

But annual matches can have negative effects too. For instance, they can: 

  • reduce the beneficial impact of dollar cost averaging;
  • mean that an employee who terminates employment before the employer makes the match will miss it; and

  • mean that participants whose 401(k)s are invested heavily in stocks could miss the benefit of a stock market rally.

So how widespread is the practice? While an Aon Hewitt study showed that just 8% of plan sponsors provide an annual lump sum 401(k) match, employers that provide an annual match include heavy hitters like Citigroup, Deutsche Bank, IBM, JPMorgan Chase & Co., Morgan Stanley and Charles Schwab. 

***

John Iekel is Senior Writer at ASPPA, as well as Editor of the ASPPA Net and NTSA Net web portals.