Tax savings that businesses have realized as a result of tax reform and the competitive labor market are leading employers to increase the amount of money they give employees in the form of a 401(k) match, according to retirement plan advisers and consultants.
The 2017 tax law cut the federal tax rate on the profits of C corporations from 35% to 21%. The law also granted businesses structured as pass-through entities, such as partnerships, S corporations and sole proprietorships, a 20% deduction on profits.
Several companies have used their newfound savings to buy back stock at record levels, give one-time bonuses and offer pay increases to employees. Companies also appear to be using their padded coffers in part to boost contributions to their 401(k) plans.
Roughly 22% of plan sponsors made a change to their company match policies in 2018, a "dramatic increase" from the previous year, according to the annual defined-contribution report published by Callan, a consulting firm. A third of these employers increased their company matches, the most popular course of action by far relative to other changes.
Aflac Inc., Honeywell International Inc., Visa Inc. and MetLife are among the public companies that announced a boost to their company-matching formulas. Visa hiked its match from 6% to 10%, for example, while Aflac began matching 100% of the first 4% of employee contributions, up from 50%.
According to Callan, another 35% of plan sponsors said they'd change their match policies this year, and nearly a quarter of those companies said they'd increase their matches.
"A lot of that [activity] has to do with tax reform," said Jaime McAllister, a defined-contribution consultant at Callan, citing anecdotal evidence based on client discussions.
Susan Shoemaker, head of the DC practice at Plante Moran Financial Advisors, said she has also seen some 401(k) clients increase their matches recently. She's seen employers funnel money into other benefits as well, such as greater contributions to health savings accounts and helping employees pay down student loan debt. Where employers spend their money is driven by employee demographics and what will deliver the biggest benefit, she said.
Ms. Shoemaker views the amped-up employer benevolence as an interplay between the newfound tax savings and a competitive labor market. In September, the unemployment rate hit its lowest level in nearly four decades, 3.7%. It was only marginally higher as of December, at 3.9%.
In this market, attractive benefits packages can play a crucial role in employees' calculus.
"I think definitely there's more competition than there used to be," said Jason Kolinsky, a retirement plan adviser and partner at Kolinsky Wealth Management. "Nowadays, people are getting a decision as to whether they want to take a job."
Of those companies that increased their matches in 2018, half were employers in the technology sector, and the remainder were a mix of health-care, financial services and telecommunications firms, according to the Callan data. The 401(k) plans skewed to the larger end of the scale — from $100 million in assets to as large as $5 billion.
However, advisers like Ms. Shoemaker have had smaller clients that amended their matches, too.
Large companies tend to be structured as C corporations. Their new tax break on corporate profits is permanent, whereas the break for pass-through entities is temporary.
The majority of private businesses in the U.S. — more than 90% — are structured as pass-throughs, according to the Tax Foundation. Their 20% tax deduction, which is available only to pass-throughs meeting certain qualifications, is set to expire in 2026 unless extended by Congress.
Pass-throughs that increased their 401(k) matches could scale back the benefit at that time if after-tax profits shrink, advisers said, because most 401(k) plan documents state that a match is subject to the employer's discretion. That dynamic occurred during the 2008 financial crisis, they said.