When times are tough, companies find cost savings wherever they can. Now some employers are doing away with the 401(k) match, a benefit once considered almost sacred.
The list of companies that have suspended or cut back corporate matching in their defined-contribution retirement plans this year is not trivial. It includes General Motors (GM), Frontier Airlines (FRNTQ), car-rental company Dollar Thrifty Automotive (DTG), broadcaster Entercom Communications (ETM), newspaper chain Lee Enterprises (LEE), and real estate brokerage Cushman & Wakefield. A recent study by benefits consultant Watson Wyatt (WW) of 248 U.S. companies found that 2% had already reduced or eliminated the match and another 4% expected to do so within the next 12 months. The national number could creep higher, however, if the economy continues to worsen. "It depends how long this goes on," says Pamela Hess, director of retirement research at benefits consultant Hewitt Associates (HEW). "In another year, you could have another 3% to 5% [cutting back on matches], or you could have 10%."
Lesser of Two Evils
The psychological impact of these cuts may be almost as damaging as the financial harm. Coming at a time when many Americans are struggling to save for retirement and face shrunken stock portfolios, the cutbacks make the goal of a secure retirement even more elusive. Yet for all the unhappiness over slashed 401(k)s, employees understand the alternative of increased layoffs may be worse, says Robyn Credico, Watson Wyatt's national director of defined-contribution plans. In general, they "would rather have their jobs and a reduced match."
Workers who have survived earlier downturns may have a sense of déjà vu. From 2001 to 2003, for example, GM, Charles Schwab (SCHW), Ford Motor (F), CMS Energy (CMS), Great Northern Paper, and at least 10 others reduced or eliminated the match, according to a study by the Center for Retirement Reserach at Boston College. And even though most companies reinstated the benefit a few years later as business improved, the match continues to be an easy target. It typically amounts to 50% of employees' contributions on up to 6% of their annual salaries. That means the average company spends nearly 2% of employee pay on this one benefit, according to research by fund company Vanguard. The vast majority of companies that offer 401(k)s include the benefit, and "they can save millions by cutting [it]," says Hewitt's Hess. "It's usually one of a company's biggest expenditures after wages and health care."
Even if the benefit eventually is restored, that won't be enough to ease retirement woes for many employees. Goodyear Tire & Rubber (GT) cut its match in 2003; it now plans to reinstate it in January 2009. In the intervening years, the company froze its pension, so the return of the match will not bring retirement benefits back to the earlier level. "The company is moving away from a pension plan and we are enhancing our 401(k) plan," explains spokesman Scott Baughman.
New-Employee Enrollment Could Drop
The trend away from pensions—many of which are now underfunded—leaves retiring employees increasingly reliant on their 401(k)s. In the Watson Wyatt study, for example, 11% of companies said they had frozen or closed their pension plans this year, and another 4% said they expected to do so in the next 12 months. That throws even greater weight on matching plans as part of the nest egg.
What does this trend signify for employee savings behavior? Academic studies show that the existence of a 401(k) match increases contribution rates among employees, but the research doesn't address what happens when a match is cut. Brigitte Madrian, a professor of public policy and corporate management at Harvard University, has studied 401(k) design and behavior. She thinks the end result will be a "small fall" in 401(k) participation as fewer new employees sign up and existing employees stick with the status quo, neither pulling money out of the plan nor adding to contributions. Says Madrian: "You will find the biggest effect on new employees walking in the door. Employees who were already signed on for the plan aren't going to drop out because there's not a match."