Employer matches aren’t as strong an inducement to get employees into the 401(k) plan as you might think, according to Brigitte Madrian, professor of public policy and corporate management in the Aetna Chair at Harvard’s Kennedy School of Government.

While matches are great for employees once they’re in the plan, they’re not the best tool to encourage enrollment in the first place, Madrian said during a Web briefing sponsored by State Street Global Advisors, which recently launched its Defined Contribution Investor Survey report.

Madrian made it clear she’s not advocating employers get rid of their employer match, only that they should be aware of its actual impact.

A far better enrollment tool is a planning aid such as a simple, one-page sheet with step-by-step instructions – including a time frame for how long each step will take, she said. According to a study cited by Madrian, this type of tool can increase enrollment by as much as 45%.

Once in the plan, the employer match threshold is a far stronger lever in getting employees to save more, said Madrian, citing the examples of two matches: thirty cents on the dollar up to 10% of pay and fifty cents on the dollar up to 6% of pay. Both matches amount to the same but employees will tend to focus on saving up to the threshold in order to get the match.

State Street’s survey of more than 1,000 401(k), 403(b), 457 and profit-sharing plan participants reveals a gap between understanding what’s important and knowing how to take action. Seventy-eight percent of respondents, for example, think it’s important to determine how much they’ll need to save to have a secure retirement yet only 33% feel knowledgeable about it.

“We are encouraged that employees who participate in DC plans know what is important, but they simply don’t know what to do,” says Kristi Mitchem, senior managing director and head of global defined contribution for SSgA. “Employers want their employees to be financially successful, not necessarily financial experts. We need to turn confusing tasks into clear steps, not with investment lingo, but with simple, clear descriptions and explanations. We also need to take advantage of tools that simplify, like automatic savings and professionally managed target-date funds.”

Other survey findings include:

  • About 40% of respondents expressed uncertainty about the risk and return characteristics of common investments in 401(k) plans, including international equity funds, stock index funds, and stable value funds.
  • About 67% know adjusting their investments over time is important, but only 30% say they know how to do this.
  • About 82% think it’s important to know how to make retirement savings last a lifetime, but just 28% say they know how to achieve this.
  • More than half of survey respondents admitted they don’t know what target-date funds are, or are not familiar with how they work.

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