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The 401(k) Match is Archaic

We’ll admit it. The title of this article is intended to be provocative.  Yet, we stand by our claim and will defend the fact that 401(k) matching contributions really are akin to dinosaurs in the modern employee rewards portfolio. 

First, let’s recognize why matching contributions exist in the first place.  As 401(k) plans began to surge and outnumber traditional pension plans, the responsibility and cost of creating an income stream in retirement shifted from employers to employees.  Employers deemed it a shared responsibility with the employee to save for one’s retirement.  To execute on that shared responsibility, employers offered matching contributions within the 401(k) plan, meaning that an employee would only receive the company contributions to their account as long as they made contributions from their own money as well. Matching contributions incent employees to save money in the 401(k).

Next, we need to realize that 401(k)s are simply one type of tax advantaged vehicle competing for the hard-earned dollars of employees.  In addition, we’ve got IRAs, Health Savings Accounts (HSAs), Flexible Spending Arrangements (FSAs), 529 College accounts, and the list goes on. All of these ‘accounts’ provide a tax advantage to the person contributing to those accounts. Of particular importance is one of the newest allowed by the tax code: the HSA.  Of even more importance is that HSAs are the most tax-advantaged of any of the accounts noted above.  Many refer to this as the triple tax advantage, and a discussion of such advantage is beyond the scope of this discussion. Rather, we will simply summarize by saying HSAs are better than 401(k)s.

Lets summarize the facts so far. 1) Matching contributions incent employees to save money in the 401(k). 2) HSAs are better than 401(k)s. When summarized together, it’s easy to see how 401(k) matching contributions have become an archaic plan design. 401(k) matching contributions incent employees to save money in a sub-optimal manner, or in an account without the greatest tax advantages to the employees, or in an account that is inferior to another type of account. In the absence of any matching contributions, employees would be advised to put their money into the best account available – the HSA.  This would provide the greatest benefit and advantage to the employee. 

Fortunately, modifying and modernizing the rewards portfolios is relatively easy.  Rather than creating the greatest incentive for employees to save into the 401(k), we might suggest creating the greatest incentive for employees to save into the HSA. Now, if you still want to have a matching contribution in the 401(k) at an even or lesser rate than the HSA match, we’re okay with that too! 

Contributed by Brian Riefepeters of Calder Consulting Group

Connect: (e) Brian@Riefepeters.com (o) 616.235.2442