By Sarah Krouse
Some employees who haven't saved enough for retirement are now
getting more money from an unlikely source: their employers.
Companies from Microsoft Corp. to Host Hotels & Resorts Inc.
are boosting contributions to their workers' 401(k) plans, a move
many firms have long resisted because of the costs.
The average company contribution to 401(k)s rose to an estimated
4.7% of employee salaries in 2016, up from 3.9% in 2015, according
to data on 1,900 workplace retirement savings plans run by fund
giant Vanguard Group. It was the highest percentage and biggest
year-to-year jump since at least 2007.
"It's a no-brainer to try and max that out as much as possible,"
said Francois Burianek, a 43-year-old senior software engineer for
Microsoft's Xbox gaming unit, who raised his 401(k) contributions
by more than 70% after the technology giant increased what it was
prepared to match.
Here's why this is happening: Some companies in certain
industries say they need to spend more to retain the best employees
and motivate staff. They also need to ensure that older, relatively
expensive workers can afford to retire on time and make way for
younger staff, retirement experts said. Employees who don't have
adequate nest eggs will stay in their jobs longer and add to a
company's overall health-care costs.
The boost in contributions represents a policy shift for
American companies that embraced tax-deferred 401(k) plans partly
because the savings tool allowed them to shift the burden of paying
for retirement to employees. Many shed more expensive
defined-benefit pension plans that guaranteed employees a certain
percentage of their salary in retirement.
Companies tried to encourage more 401(k) savings over the past
decade by automatically enrolling workers in the plans and boosting
the amount employees set aside each year unless they opted out.
But many U.S. workers still aren't saving enough on their own.
The average percentage they set aside among Vanguard-run retirement
accounts has dropped since 2007 largely because more new 401(k)
savers were enrolled at lower initial savings rates. The average
total employee and company contributions to workplace savings plans
among workers who participate, as a result, haven't moved above 11%
of salaries for at least a decade.
Many retirement plan advisers say employees need to save about
15% of their salaries each year.
"If you want people to retire at a certain time they need to
have acquired sufficient assets," said Jean Young, a senior
research analyst at the Vanguard Center for Investor Research.
"There's a growing interest among some employers in supporting that
dynamic," with more money, she said.
The added contributions by some companies are a stark change
from the depths of the financial crisis when many employers
suspended or pared back contributions. The prolonged economic
recovery in the years since has put many companies on more stable
footing.
A 401(k) is an employer-sponsored plan that allows workers to
contribute part of their pretax pay up to certain federal limits.
That money is typically not taxed until it is withdrawn and
participants generally pick from a list of funds and investment
options. Companies aren't required to make their own contributions
to employee accounts but some companies agree to match a portion of
what workers chip in. These accounts rise and fall with financial
markets.
Some firms, particularly in the technology industry, are using
more generous 401(k) contributions to help attract and retain
talent, according to Aimee DeCamillo, head of retirement plan
services at T. Rowe Price Group Inc.
Ultimate Software Group Inc. steadily increased the company
match for its $281 million 401(k) plan in recent years as it met
new revenue targets. In January 2016 the Weston, Fla.-based company
pushed its match to 40% of any employee contribution up to federal
limits for its roughly 3,700 workers, up from 35%.
Another company that recently contributed more of its own money,
Host Hotels, said it hadn't done enough to get employees closer to
the savings rate many retirement advisers recommended.
"We weren't getting people to the 15%" contribution level
retirement advisers recommend, said Karen Montague, director of
total rewards at Host Hotels, a real-estate investment trust that
owns properties run by big hotel chains such as Hilton Worldwide
and Marriott International Inc.
So in April Host increased its company match and now chips in 50
cents of every dollar its 220 employees invest in its 401(k) plan,
up to 8% of their salary, an increase from the previous 6%
limit.
Host also has a discretionary matching system that matches as
much as an additional 4% of salary each year, up from 3% before the
change.
The change to Host's matches means the company is likely to
contribute an additional $250,000 to the plan, based on 2016
contribution data. Increasing the discretionary component could
result in another $300,000 a year, the plan's administrator
said.
In Seattle, Microsoft tried to change employee behavior before
increasing its own contributions. Roughly three years ago it
increased the salary amounts workers pick to contribute when they
sign up for a 401(k). Workers now choose from the options of 8%,
10% or 12%, as compared with 6%, 8% or 10%.
Last year Microsoft offered more money to the more than 60,000
current employees in its 401(k) plan. Instead of chipping in half
of up to 6% of each worker's salary, the firm started matching half
of all employee contributions up to federal limits. The government
limits employee contributions and sets an overall limit on the
amount channeled into an individual's plan.
As a result of that change the technology giant contributed
roughly $150 million more to its $17 billion retirement savings
plan last year.
After one year of the increased match 52% of Microsoft workers
had maximized the amount of pretax money they contributed to the
plan, up from 36% in 2015, the company said. That was half the time
the company's research suggested it could take to get 50% of its
employees to maximize the amount they contributed.
"It's blowing my budgets," said Fred Thiele, general manager,
global benefits at Microsoft.
But the move encouraged more workers to save additional money
for retirement, particularly those with lower incomes, which was
the company's intent.
Write to Sarah Krouse at sarah.krouse@wsj.com
(END) Dow Jones Newswires
July 17, 2017 05:44 ET (09:44 GMT)
Copyright (c) 2017 Dow Jones & Company, Inc.
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