Maximizing employers’ 401(k) contributions

Have you ever considered whether the employer contributions made to your employees’ retirement plans are being used to help make the maximum impact to both the company and participants?

Two employees, a woman and a man, looking at and writing on a whiteboard in the office.

Marc Howell, FSA, EA

Managing Director, Enhanced Plan Design at Principal Financial Group®

4 min read | January 23, 2025

There’s a lot of money in retirement plans and a sizeable portion includes employer contributions. Organizations have a responsibility to know their employer contributions are being used to help meet the goals for both employees and employers. To make every dollar count, employers can transform matching contributions into meaningful benefits that can help strengthen both their employees’ retirement security needs and their workforce goals.

$7.4T

401(k) plan assets

30%

Of total contributions into large 401(k) plans were from employer contributions.

Driving what matters in the 401(k) plan

However, many organizations may unknowingly be using employer funds inefficiently because of ineffective plan design. Most plans are designed to deliver a “one size fits all” benefit where everyone receives the same employer match percentage. While this often makes sense, this approach may not always meet a plan sponsor’s goals or workforce concerns.

For example, sometimes companies struggle with high turnover among short-term employees. For employers that value and want to incentivize longer service, providing the same level of benefits to all employees may not encourage or help achieve that goal. Even for plan sponsors operating under safe harbor provisions, an assessment should be made as to whether the plan structure still aligns with current workforce dynamics and objectives.

Below are a couple of examples showing how plan sponsors redirected employer contributions to help maximize the use of those funds.

Goal: Rewarding longer employee service

A large plan sponsor discovered a substantial number of employees were leaving within their first five years of employment. They were in safe harbor but upon examination, realized they no longer needed to stay in safe harbor and could get more creative. With some plan modeling assistance, they decided to move to a match structure that rewarded longer service.

Previous plan design	New plan design
Safe harbor	Non-safe harbor
Auto-enrollment at 3% Auto-increase to 6%	Auto-enrollment at 6% Auto-increase to 10%
Employer match the same for all employees	Employer match based on years of service: < 5 years – lower match 5-10 years – original match > 10 years – increased match

*Tiered match would require additional plan testing and related fee.

While encouraging employee retention, this new plan design also decreased the employer contributions into the plan by $3.5M. The employer then explored how this additional $3.5M could be used to further benefit longstanding employees even beyond what the updated retirement plan would accomplish. Many options were examined, including:

Funding a bonus program for specific employees with hard to recruit skills to be paid out after a designated length of employment.
Testing other retention efforts to determine if spending to keep employees longer saves more than the cost of recruiting new employees.
Offsetting the cost of increasing the auto-enrollment default deferral percentage from 3% to 6% to help the entire employee base save more for retirement.

Goal: Offering additional benefits by finding cost savings via automated-features

A plan sponsor was using non-elective or profit-sharing type contributions to help drive employee savings. After an analysis, it was determined that changing to a strong match, combined with auto-enrollment and auto-increase, may drive better outcomes at a lower cost. Like the example above, the savings could be redirected towards other higher valued benefits, such as:

Offsetting health care cost increases
Adding a student loan assistance program
Adding retention bonuses for key skill sets

Strategies to help meet everyone’s needs

These examples highlight the potential for employers to adjust their matching contributions and provide more tangible benefits both within retirement and outside of retirement. Ultimately, the goal is to create a win-win situation where both employers and employees benefit. With the right strategies in place, companies can use these savings to help strengthen their workforce, boost retirement savings participation, and enhance overall employee satisfaction.

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In today’s competitive talent market, the most successful organizations will likely be those that look at inefficiencies not as a burden, but as an opportunity to reinvest in their employees and help build a brighter financial future for everyone.

It’s important to work with a retirement service provider who understands and has the expertise to consult on options to help deliver the desired results. If you’re looking for help to identify employer contribution inefficiencies and/or ways to repurpose those potential savings, reach out to your Principal^® representative.

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Investment Company Institute, Quarterly Retirement Market Data, Table 7--401(k) plan assets, December 31, 2023.

Godbout, Ted, Declining Fees, Employer Contributions Help Boost 401(k) Plan Participants. American Society of Pension Professionals & Actuaries (ASPPA), August 23, 2024.

Maximizing employers’ 401(k) contributions

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Footnotes