In Battle for Workers, the Humble 401(k) Gets Richer in 2022

Employers are confronting a labor market in which workers are more mobile than ever. Employers reported having 10.6 million job openings in November, a month when only 6.9 million people were unemployed. That same month, a record 4.5 million U.S. workers quit their jobs, in most cases taking positions with new employers, Labor Department data show.

“Employers are very nervous about this ‘Great Resignation,’” said Dave Stinnett, head of strategic retirement consulting at Vanguard Group, which administers 1,700 401(k)-type plans for employers. “They have a lot of job openings, and it’s taking longer to fill them.”

Companies competing for workers are raising salaries, leading to rapidly rising wages. “There is a realization that they need to do more” by enhancing benefits too, Mr. Stinnett said. Vanguard has gotten more questions from clients about raising their matches than any other topic over the past six months, he said.

Those taking action are typically boosting their match by 1% to 2% annually or are making one-time contributions on top of the match, Mr. Stinnett said. Others are allowing new hires to participate in the 401(k) plan immediately, rather than after a waiting period, or are reducing the time an employee must work before taking ownership of the employer’s contributions on their behalf, he added.

Some employers are boosting their 401(k) matches after shedding or freezing traditional pension plans, which guarantee employees a certain percentage of their salary in retirement.

On Jan. 1, consulting firm KPMG U.S. LLP replaced its 401(k) match with a contribution of 6% to 8% of employee pay, including bonuses. The exact contribution varies according to a worker’s age and tenure. The firm’s more than 34,000 workers receive the money whether they contribute to the 401(k) or not. Previously, the company matched 25% of up to 5% of eligible base pay an employee contributed.

The enhanced 401(k) contributions, which are part of a broader initiative to boost employee benefits, started after the firm froze its pension plan on Dec. 31.

“In a tight labor market we want to be in tune with the kinds of benefits we need in order to compete,” said Chief Human Resources Officer Darren Burton. He added that KPMG recruits on average 6,000 employees annually, many of whom feel they can benefit more from a 401(k) plan than a pension, which ceases to accrue benefits when an employee leaves the firm.

The company declined to disclose the cost of the new benefits.

Starting Jan. 1, Facebook parent Meta Platforms Inc. raised its 401(k) match to a dollar for every dollar its employees contribute, up to $10,250 this year, or $13,500 for those 50 and older. That was up from a prior match of 50% of participant contributions up to 7% of pay, the company said.

Companies aren’t required to make 401(k) contributions, but most do, according to Vanguard. The most common approach among Vanguard clients is to match half of the amount workers put into their accounts, up to 6% of pay.

In 2020, a wave of companies suspended or reduced their 401(k) matching contributions early in the pandemic. By the end of 2020, the economy had rebounded, and many had reinstated those matches.

About one-third of the companies surveyed by Callan that raised their contributions in 2021 reinstated matching contributions they had cut earlier in the pandemic, said Jamie McAllister, a Callan consultant who specializes in 401(k)s.

Some employers said boosting or instituting a 401(k) match was also a way to spread the fruits of higher profits because of an economy that was stronger than many business owners predicted in the early days of the pandemic.

Troy Lerner, chief executive of Denver-based digital ad agency Booyah Advertising, in January 2021 doubled the match on the retirement plan he offers his roughly 100 employees. When Covid-19 arrived in 2020, he laid off more than 20% of his staff but soon realized he had overcorrected, he said. He began calling employees back—and hiring aggressively—when e-commerce took off and business picked up.

Before 2021, Booyah contributed up to 2.5% of an employee’s salary to a 401(k) account, or 50% of employee contributions up to 5% of the person’s salary. Now, the company will invest up to 5% of the person’s salary, matching 50% of the employee’s contributions up to 10% of the individual’s salary.

While retention hasn’t been a big problem at Booyah, the company made the decision to raise the match in part because of “the dark cloud of headlines and people saying the Great Resignation is coming, and our expectation that people would be heading for the doors soon,” Mr. Lerner said.

It also makes more sense from a tax perspective rather than boosting salaries, he added.

Employees typically contribute part of their pretax pay to a 401(k), which reduces their taxable income. That money generally isn’t taxed until it is withdrawn in retirement.

Employer 401(k) contributions are deductible on the employer’s federal income tax return, up to certain limits.

“The first thing you have to do with a dollar of salary is pay income tax,” Mr. Lerner said. “Here I’m giving you a dollar with a tax benefit that can make a big difference later in your life. And it’s a gift you’ll probably receive long after you’ve left Booyah, but I’m OK with that.”

Write to Lauren Weber at [email protected] and Anne Tergesen at [email protected]