401(k)s: Employer Contributions Get the Ax
Desperate to cut costs, more and more companies are eliminating their matching contributions to employee 401(k) plans
Amy Feldman / Business Week
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.”