CU Employers Beat Banks on 401(k) Matches
The latest surges in the stock market may be one clear sign that consumers are treading back into safe waters as they throw lifesavers to their submerged 401(k)s and other retirement plans.
To track some of the newest trends that have emerged since the Great Recession, CU Times partnered with Judy Diamond Associates Inc., a Washington-based publisher of employee benefits industry prospecting tools and plan data. Both entities are subsidiaries of Summit Professional Networks, a provider of digital and print content services for the financial services, insurance and legal industries.
Judy Diamond put together a list of all the defined contribution, ERISA-qualified retirement packages at 5,455 credit unions and 6,137 banks, according to Eric Ryles, managing director at the firm. The data came from IRS and Department of Labor 5500 benefit plan disclosure forms, which are required by law to be filed each year.
One highlight from the findings showed the average employee contribution per active participant for 401(k) plans from 2012 to 2013 was $3,704 at credit unions and $3,652 at banks, a difference of only $52.
However, credit union employers were well ahead of their banking counterparts. The average employer contribution per active participant for 401(k) plans during the same period was $3,292 at credit unions and $2,489 at banks – an $803 difference.
“The small difference in employee contributions is largely due to the fact the rates of pay are similar among staff members at both credit unions and banks. Therefore, the salary savings rates tend to be very similar,” said Richard Rausser, SVP of client services at Pentegra Retirement Services, a White Plains, N.Y.-based provider of retirement planning services to financial institutions, including credit unions, and organizations nationwide.
One reason for the disparity in employer contributions is that credit unions make contributions to one or two qualified retirement plans rather than up to three qualified plans at banks, Rausser explained.
“Credit unions typically sponsor a 401(k) plan and in many cases, they also sponsor a defined benefit plan. Banks typically sponsor a 401(k) plan as well as a DB plan and/or an (employee stock option plan),” Rausser said. “While the overall level of employer contribution to all qualified plans sponsored by credit unions and banks are very similar, the fact (that) credit unions sponsor one or two qualified plans permits them to contribute more to their 401(k) plan.”
A few years ago, the Great Recession brought many Americans to their knees as employers scaled back and in some cases, halted matching contributions to their employees’ 401(k) plans.
Read more: How contributions have changed during the recovery ...
According to a June survey from wealth management research firm Spectrem Group of more than 1,500 investors with $100,000 to $25 million of net worth, more than two-thirds wished they would have saved more and a quarter wished they would have deferred more into their 401(k)s prior to the recession.
The landscape has certainly changed since then as the average 401(k) balance increased by 12.9% to $91,000 at the end of the second quarter of 2014, which was up from $80,600 at the end of the second quarter of 2013, according to Fidelity Investments. Employees contributed an average of $6,050 to their 401(k)s in 2013 while employers contributed an average of an additional $3,540.
Like Rausser, Paul Wannemacher agreed that in general, bank and credit union pay for like positions are very similar, he noted, citing data from career website Glassdoor. Wannemacher is the resident certified financial planner at El Segundo, Calif.-based Financial Finesse Inc., a provider of financial education programs to more than 400 credit unions, corporations and municipalities.
“Most employees of banks and credit unions are somewhat interchangeable in that their roles, work functions and education level is similar,” Wannemacher said. “Pay varies with regional cost of living and local demand for talent but since both have overlapping job types and pay scales, it goes to reason that employee contributions to retirement plans would be in a comparable range.”
Why the average employer contribution to 401(k) plans is significantly higher at banks is a bit more complex, Wannemacher pointed out. For one, Financial Finesse's research on employee benefit utilization showed an upward trend in general, but particularly where employers effectively engage employees in utilizing the benefits offered, he said.
“Credit unions often see themselves as agents of disseminating financial wellness among their member-clients, an emphasis that may differ from most shareholder-owned banks, Wannemacher said. “Banks generally employ financial wellness programs as a client benefit for plans they manage or as a public education offering and may view their employees as already financially well-informed.”
Second, depending on the size and ownership structure of the bank, many larger ones offer bonus compensation and may offer stock options and stock appreciation rights to certain employees as well as generous paid time off and a subsidized stock purchase program, Wannemacher said. As a result, many banks view the 401(k) match as one of many benefits offered employees.
Credit unions can't offer equity-related benefits and will be limited as a not-for-profit on bonus payout potential, so their retirement plan matches may be the benefit that helps them compete for talent, Wannemacher explained. Credit unions also have a smaller employee group to match for, so the match allocation is spread over fewer positions, he added.
The last factor may simply be employee tenure and status. Banks tend to employ more part-time employees per capita than credit unions, and this, along with higher employee turnover rates, may also be a factor in the lower per-employee match, Wannemacher said.
Banks may also require longer employer contribution vesting periods and slower entry into 401(k)s than credit unions due to the higher rate of acceptable employee turnover, he noted, citing industry data on low employee turnover.
“Factor in that credit unions are not-for-profit entities that don't have the bank's corporate tax rates on profits, and it seems possible that credit unions may be able to offer more generous 401(k) matches per employee,” Wannemacher said.
While 60% of the respondents in the Spectrem Group survey said their financial situation had improved in the last year and 59% said they expected an improvement over the next 12 months, the majority or 64% expressed concerns that they might not be able to retire when they want to.
“Even though the recent stock market boom has increased the balances of plan participant accounts, concern over paying for retirement remains high,” said George Walper Jr., president of Spectrem Group. “Many baby boomers are just beginning to realize they may not have saved what they need to ensure a steady stream of income for their retirement.”
Meanwhile, because credit unions tend to treat all employees equally and the 401(k) becomes the primary retirement benefit for all employees, most of the credit union's funding for retirement benefits goes into their 401(k) contribution, said Larry Miller, president/CEO of Everence Financial, a financial services firm in Goshen, Ind.
“I think banks tend to offer additional retirement benefits to higher compensated employees as compared to credit unions and as well as stock options to executives. Bank contributions to the 401(k) are therefore, not as high.”
David Shucavage, president of Carolina Estate Planners in Wilmington, N.C., said he often tells his clients to join a credit union for their regular banking needs because they offer a better deal than banks.
“This (JDA) data demonstrates that they may well be a better deal for their employees as well,” he observed. “Employers in all industries have policies for how much they match employee contributions to their 401k plans. Some match 100% up to an amount, some 50%, some none at all.”
He added, “The fact that both groups of employees contributed the same amount but there is a wide disparity in how much the employers contributed tells me the banks match very little by comparison. So, it tells me credit unions are more generous in contributing to their employee plans than banks.”