Certified Plan Sponsor Professional (CPSP) Practice Exam

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What has research indicated about the effectiveness of a "stretch" matching formula?

It consistently raises participant contribution rates
It has no impact on contribution rates
It leads to a decline of 25-50% in contribution rates
It prevents employers from making any contributions

The correct answer is: It leads to a decline of 25-50% in contribution rates

Research has shown that a "stretch" matching formula can lead to a significant decline in contribution rates among participants. A stretch match, which typically involves matching contributions at a higher rate up to a certain limit, can create a perception that participants are adequately contributing when they may not be maximizing their potential savings. This phenomenon is often referred to as "anchoring," where participants may anchor their contribution levels to the higher match rather than aiming for their optimal savings rate. Consequently, rather than incentivizing participants to increase their contributions, a stretch match can unintentionally lead to reduced overall participation or a plateau in contribution levels, which the research suggests could be as severe as a 25-50% decline in contribution rates. Therefore, understanding the implications of various matching formulas is crucial for plan sponsors aiming to encourage higher participant savings.