When it comes to attracting and retaining staff, the robustness of an employer’s matching contribution to their defined contribution retirement plan is a significant factor.

Allison Cole, a postdoctoral fellow at the National Bureau of Economic Research—who spoke at the DCIIA Academic Forum on Wednesday—said that when given the choice between a job that offers higher wages but no employer match and a job that offers lower wages but has an employer match, many highly skilled workers will sway toward companies that offer a generous retirement plan.

In her research, Cole analyzed a large dataset of employee resumes that made up about one-third of the U.S. workforce. The data allowed her to directly observe employees moving from firm to firm, as well as the corresponding wages and retirement benefits each firm offered.

Cole noted that this database skewed toward high-income and more skilled employees.

“I find that workers are about two or three times as sensitive to an extra dollar of retirement relative to an extra dollar wage when choosing amongst otherwise similar jobs in the same industry applications,” Cole said.

Pick Your Benefit

In addition, Cole conducted an experimental survey, showing people side-by-side job offers in which the only thing that differed between the two was the wage and retirement offerings.

For example, one job would offer a $50,000 annual salary with no 401(k) match, and another would offer a $49,000 annual salary with an employer match of up to 3% of savings (potentially worth $1,470). Cole’s research showed that 70% of people chose the job with the higher match and lower wages.

Within higher-income employees and occupations with an older workforce, Cole found an increased willingness to forgo additional wages for better retirement benefits. However, looking at younger and lower-income occupations, Cole said employees had, largely, a higher sensitivity to wages than higher-income employees.

She said this poses a challenge for employers, as they cannot tailor retirement benefits to each individual employee due to nondiscrimination testing.

“This makes it hard for the employer to [create] the [retirement] package that’s going to appeal to the largest cross-section of workers,” Cole said.

Cole added than an employer’s benefits offerings may depend on the kind of workforce it is trying to attract. For example, if a company is aiming to attract highly skilled and educated workers who will be earning higher incomes, the employer might want to skew compensation more toward retirement.

A Plan Sponsor’s Perspective

Carissa Dunaway, the division director and pension and savings administrator at the Oak Ridge National Laboratory in Tennessee, spoke about her work overseeing a large defined benefit plan, with almost $4 billion in assets under management, as well as a defined contribution plan. Participants are able to contribute to the DB plan, and there is a 92% participation rate in the DC plan.

Dunaway explained that the company is a government contractor for the Department of Energy and is able to offer a rich package of retirement benefits. During the COVID-19 pandemic, she said many employees left the company because it did not allow for a remote-work environment, and the retirement package was no longer wanted because many found jobs in the private sector that offered 15% to 20% more pay.

“We had to work with our compensation team to get the compensation up so that we could retain our employees,” Dunaway said.

She added that the company has a large number of younger employees starting out who do not understand the benefits of a DB plan. Therefore, in order to attract and retain these workers, raising wages proved a beneficial solution.

“I found that [with] employees that are there for 10 to 15 years, at the beginning they didn’t value the DB [plan],” Dunaway said. “Then their perception changes once they’ve been there [longer], and they appreciate the [DB plan]. So it’s all about communication and education. It’s very confusing for the younger ones who don’t know what the plan is, so trying to explain that to them … is a lot to understand at an early age.”