A recent conversation with a colleague about a company’s 401k contribution matching strategy triggered an interesting reflection on how equity (fairness) is handled in different company benefits.
Many companies, caring for their employees’ long-term financial well-being, incentivize employee contributions to their 401k plan by offering to match their contributions up to a certain percentage of their salary (3% and 6% seem to be the most common ones).
That incentive can lead to some interesting outcomes. Consider 3 employees of AcmeCorp, making $75K, $150K and $300K respectively. AcmeCorp matches its employees 401k contributions up to 6% of their salary. All three are hard-working and care deeply about their long-term financial well-being so they contribute the maximum amount they are allowed to contribute to their 401k each year — currently $19,500.
- Employee A ($75k) will receive a $4,500 match from AcmeCorp.
- Employee B ($150K) will receive a $9,000 match from AcmeCorp.
- Employee C ($300K) will receive a $18,000 match from AcmeCorp.
Same contributions. Very different matches. A cynic may say that this incentive scheme acts as a regressive tax — the more you earn, the more you benefit from it. The less you earn, the less you benefit from it.
Ironically, the reason many companies opt for this matching scheme is because of regulations by the IRS that require companies to perform annual tests to ensure that the 401k plan does not discriminate in favor of high earners in the company. Failing the test has some pretty painful implications. However, companies that opt to use one of three Safe Harbor plan designs are not required to perform the non-discrimination test. The full match up to x% of salary is one of those three designs…
Side note: the combined contribution limit (employee + employer) during the writing of those lines is $57,000/year. So assuming an employee maxes out their portion, the employer can contribute up to $37.5k/year extra. Imagine the impact that this can have on long-term financial well-being.
What’s even more interesting is that when we zoom out, benefits are not handled according to a consistent equity standard.
Some benefits are regressive. Like the 401k example above.
Some benefits are progressive/needs-based. Like paid family leave beyond what’s legally required by law.
Some benefits are neutral. Everyone is getting exactly the same thing. Healthcare premium participation usually falls into this category. Defined PTO plans to some extend (the $ value of a day differs).
That insight brought me back to revisiting an idea I explored a year and a half ago — the Service-as-a-Benefit (SaaB) platform.
In addition to the advantages I outlined in the original post, it can also enable companies to create a more coherent benefits strategy from an equity perspective, whichever way they choose to define it. Companies can set a consistent equitable allocation of funds at the overall budget level, instead of at the individual benefit level like they do today. That budget can be set as a % of salary, a fixed sum per employee, or a more complex formula taking individual needs into account. For there, each employee can allocate those funds to the benefits that matter to them the most: a higher 401k match, a lower health insurance premium, a longer family leave, or a sitter for your cat.
Having realized that, I’m even keener about a SaaB platform today, than I was more than a year ago.