Think Twice Before Suspending 401(k) Match

CU360
May 4, 2009 | COMMENTS

Trends in 401(k) plans are shifting rapidly. At year-end 2008, a survey by WorldatWork found that a full 74% of employers reported no change in the employer matching contribution. Fifteen percent had either increased or were considering increasing the employer match. Fewer than 10% had either decreased or considered decreasing the 401(k) match. Only 3% reported eliminating the match.

More recent information, however, indicates an increasing number of employers are suspending their employer 401(k) match in response to continued cost pressures. It's tempting—most large firms could save millions of dollars by suspending their 401(k) match for only one year, according to analysis by HR consultant Hewitt Associates. Despite significant savings, Hewitt recommends employers take this step only as a last resort, due to the impact on employees' ability to save for retirement.

Hewitt's analysis shows companies can save, on average, more than $1,500 per employee each year by suspending their 401(k) match, assuming the average employer match of 50 cents to the dollar up to 6% of pay.

But suspending the employer match lowers employee participation and contribution rates. Once the match is suspended, employees may reduce their own contributions or even stop contributing to their plan entirely. As a result, employees' retirement savings shrink by thousands of dollars due to that one-year suspension. For example, younger employees earning $50,000 a year who contribute 6% of their salary would have $16,000 less for retirement than they would have had without the suspension. That number jumps to $48,000 if the employees also stop contributing during that year.

Many employees who stop contributing to their 401(k)s when their employer suspends their match don't immediately resume contributing once their employer reinstates it. Even a hiatus in savings of only a few years can deplete retirement savings by hundreds of thousands of dollars, notes Hewitt. For example, a younger employee earning $50,000 a year who stops contributing 6% of his/her salary for five years could have up to $150,000 less for retirement.

"Companies are making difficult decisions to keep their bottom lines in the black, and the employer 401(k) match is one of the costliest retirement expenditures they sustain in a given year," said Pam Hess, Hewitt's director of retirement research. "Cutting this benefit to reduce costs is a much less drastic action than eliminating jobs or reducing salaries. There are, however, less drastic steps employers can take to lower costs while still preserving the incentive for workers to save for retirement."

• Instead of cutting 401(k) matches, the following alternatives can help employers ease cost pressures while encouraging workers to invest wisely for retirement:
• Decrease the match. Employers can save substantially by decreasing their match by half instead of suspending it entirely. This still motivates employees to continue contributing to their 401(k)s, even at a lower rate.
• Communicate—but only online. Communication is a critical tool in helping employees save for retirement. Three-quarters of companies use their intranet, 60% use e-mail blasts, and 49% use webinars. Employers still using printed materials should move to online-only communication, thus saving money on paper costs.
• Make fees transparent. Employers should take a closer look at the funds they offer in their 401(k) to ensure they don't carry high expense ratios. Hewitt research shows that additional annual expenses of 0.25%—the difference between the typical institutional fund and retail mutual fund portfolio—can reduce projected retirement income substantially over time.