A True-Up Match or How to Enhance Employees' Retirement Savings
If you are an employer who truly cares about your employees’ financial future, especially their financial well-being at retirement, then offering a 401(k) plan is a must. A 401(k) plan is perhaps the best thing that has ever been introduced by the Government. Of course a 401(k) plan has its drawbacks as nothing is perfect, but all of the pros of 401(k) plans far outweigh the cons. A few of the incentives include high contributions limits, low-cost investment options, and tax deductions. However, there is another more important reason why 401(k) plans are so popular – the employer matching contribution.
The matching contribution is the key reason why so many workers all over the country participate in a 401(k) plan. Why? Because it’s essentially free money that over time adds up to years of work-free retirement and nobody wants to leave free money on the table.
As a 401(k) plan sponsor, no matter how counter-intuitive it may sound, it’s your responsibility to 1) offer an employer matching contribution and 2) encourage your employees to participate in the plan and take full advantage of the matching contribution. Unfortunately, despite participating in the plan, employees are often missing out on this unique opportunity and leaving a good chunk of free money on the table. You may wonder why that is. Let me explain.
The two most popular matching formulas are “<50% of first 6% of salary” and “50% of first 6% of salary.” For the sake of simplicity, let’s assume that an organization matches 50% of the employee contribution up to the first 6% of an employee’s salary. Then, let’s assume that an employee has a $120,000 annual salary.
The first thing you need to do is educate and encourage your employees to contribute at least 6% of their salary in order to receive the full employer match contribution. If the employee does so, he or she would make a $7,200 personal contribution and receive a $3,600 employer contribution towards their 401(k), for a collective contribution of $10,800. If an employee is contributing less than 6% of their salary, they will ultimately be missing out on free money.
Now let’s look at this situation from a different point of view. Imagine that the same employee is contributing 20% of their annual salary, or $2,000 per month. By the end of the 9th month, the employee will hit the statutory limit of $18,000 and won’t be able to contribute more. As a result, he or she will miss 3 months of employer match contributions, leaving $900 on the table ($2,700 vs. $3,600).
Another example of missing out on collecting employer match contributions would be when an employee, for whatever reasons, didn’t contribute enough to the plan for some period of time during the year. For example, due to a financial need or a hardship situation, an employee may have decided to limit contributions to the plan early in the year and then catch-up later in the year.
What is a True-Up Match and How it Works
As a 401(k) plan sponsor whose goal is to help your employees receive the full match and maximize their retirement savings, there is a good solution to the capitalizing on the employer match contributions. It is called a true-up match. The true-up match is a type of contribution that allows employees to receive employer match contributions that they would have otherwise missed out on due to maxing out their 401(k) earlier in the year, or not making enough personal contributions over some period of time during the year.
Getting back to the example above, should a plan document have a true-up match provision, the employee that had maxed out his or her 401(k) contributions by the end of September would still have received $900 of employer match contributions. The same would be true for an employee who had to defer less of their personal contributions early in the plan.
Processing a true-up match contribution usually takes about a month or two following the new year and could be done by either a plan sponsor or a recordkeeper. Should a plan sponsor miss making a true-up match contribution, the plan sponsor won’t incur any penalties due to the voluntary nature of this benefit. However, correcting this error would still be necessary.
Considering the tendency of many 401(k) plan participants to leave employer match contributions on the table thus delaying retirement, a true-up match seems to be a very good solution to address this matter. It allows rank-and-file and highly compensated employees, along with those who had to reduce their contributions over some period of the year the opportunity to receive otherwise lost money and improve their overall chances of hitting their retirement goals.
From a plan sponsor’s standpoint, a true-up match is very easy to implement and a highly coveted provision. Employees certainly won’t take it for granted. They will show their appreciation in the form of less time spent worrying about their financial future and more time focused on the productivity of their work. Finally, a true-up match is a voluntary provision and the enforcement of it is solely the plan sponsor’s responsibility. This means that there won’t be any penalties for any type of unintentional mistakes. Taking all of that into consideration, there is certainly no reason why you shouldn’t give the true-up match a shot.