Profit Sharing Versus Increased Match Formula

[Guest ghenson08]

Has anyone seen, or had personal experience with, a plan change where it was decided to do away with a profit sharing contribution only to increase the match formula? What was participant behavior after the change? Did many participants increase their deferral to the new match max?

We're doing analysis now to do away with the 3% PS but to increase our match from $/$ on 4% to 125% up to 6% but to cost it out for our finance group, it's nearly impossible since participant behavior is tough to predict.

[GMK]

Some thoughts:

It will depend on the make up of your workforce and their willingness to change their deferral election. Some participants will go for the maximum match but not defer more, and others will probably never change their initial deferral election.

The key to the analysis is to estimate how many of your 4% deferrers would be able and likely to defer more. Depending on how well you know the employees, you may be able to make a fairly accurate estimate of this number, which will be the biggest cost adder.

Also for this analysis, I would assume that persons who are not already deferring enough to get the maximum match will not change their deferral rate when you match the first 6% instead of the first 4% of deferrals. I would also assume they will not decrease their deferral rate, which is likely based on take-home pay needs and not on the match formula. So, the cost for them will be the 25% increase in the match rate.

[Lou S.]

Our experience has generally been that the vast majority of participants make little or no change to their 401(k) election when PS is converted to match.

[david rigby]

You could use a phased approach: change the match on the first 4%, and then use the optional PS contribution if desired. That might get you some feedback about whether to use "phase 2" .

Alternatively, you could ask a sample of participants.

[Belgarath]

I think GMK hit the nail on the head. "It will depend on the make up of your workforce." With some employers, particularly smaller employers that pay relatively well, I've seen pretty much 100% start deferring the extra in this type of situation. Other employers may see little change. And sometimes it depends upon the skill and presentation of the employer and investment people.

Sure wish MY employer would institute this kind of a match...

[ESOP Guy]

What little I have seen on 401(k) behavior suggests that the size of the match doesn't influence the deferral rate as much as how high one has to go to get 100% of it.

That is to say when they studied companies with similar work forces and one had a 50% of the first 6% and the other had 33.3% of the first 9% the 2nd company had a much higher average deferral rate. You will not the max match one could get in either company was 3%.

If that holds true in your company that would suggest most will try and have def at a rate that will get them all the match they can get.