Perspectives : DC Retirement | September 26, 2024

How America can boost retirement readiness

Part 2 in the “ How America ... ” series, with an interactive chart

Read time: 5 minutes

“How America Uses How America Saves,” the first in our series of articles based on How America Saves 2024, offered tips on how retirement plan sponsors and advisors can improve plan participants’ chances for retirement success.

The next two articles will focus on one particular metric that can boost participants’ chances even further: the participant’s total saving rate, which consists of the employer’s contribution rate and the employee’s deferral rate.

In 2023, says Vanguard’s Jeff Clark, the author of How America Saves 2024, “our participants’ median total saving rate was 11%, which means that about half were saving at strong levels and the other half may need to save more.” How much more? “We recommend that participants save at least 12% to 15% of their pay, including both their contributions and the employer match, to meet their retirement goals,” he says.

Offering employer matching contributions

Defined contribution plans with employee-elective deferrals can be grouped into four categories based on the type of contributions that the employer makes to the plan:

Plans with matching contributions only.
Plans with nonmatching employer contributions only. ¹
Plans with both matching and nonmatching contributions.
Plans with no employer contributions.

As Figure 1 shows, 96% of Vanguard plans offered some type of employer contribution in 2023 (with 10% offering only nonmatching contributions), covering 99% of participants. And 43% of participants were in plans that offered both matching and nonmatching contributions.

Figure 1: Types of employer contributions, 2023 estimated

Vanguard defined contribution plans permitting employee-elective deferrals

Type of employer contribution	Percentage of plans	Percentage of   participants
Matching contribution only	50%	53%
Nonmatching  contribution only	10%	3%
Both matching and nonmatching contribution	36%	43%
Subtotal	96%	99%
No employer contribution	4%	1%

Source: Vanguard 2024.

Employer matching contributions can provide an incentive (“free money”) for employees to save more, which would help improve their retirement readiness. In 2023, the median employer match was 4%, and the employee deferral rate to receive the full value of the match was typically 4% to 6%. To reach a total saving rate of 12% to 15%, many participants need to save above the employer match level—unless the plan offers extraordinarily generous employer contributions.

The first article in the series described how the How America Saves industry reports can help plan sponsors and advisors benchmark their plans to keep them competitive. Among the measures provided in those industry benchmark reports is the median employer matching contribution, which Figure 2 displays by industry and plan size.

Figure 2: Median employer matching contribution rates

Source: Vanguard 2024.

Aligning the enrollment default rate to the employer matching rate

To boost participants’ retirement readiness, Clark suggests tying the employer matching rate to the employee default deferral rate. Setting an employee enrollment default rate equal to the maximum employer match value helps employees maximize their retirement benefits, he says. “That way, employees don’t miss out on any of the employer match."

¹Nonmatching contributions are typically structured as a variable or fixed profit-sharing contribution or less frequently as an employee stock ownership plan (ESOP) contribution.