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
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.”