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As if we needed another sign that this may be the Great Recession, it appears some companies that suspended their 401(k) match might not restore it completely.
In past downturns, most companies that stopped matching employee contributions to 401(k) accounts simply reinstated the match when the economy recovered. This time might be different. Consultants report that clients are considering options including tying their 401(k) match to profits or using some of that money for other benefits.
Companies have more flexibility than most people think when it comes to their 401(k) plans.
The current average match is 50 cents on the dollar up to 6 percent of pay. For example, a worker earning $50,000 a year contributes 6 percent, putting $3,000 into the 401(k) account and the company puts in $1,500.
Using that average figure, companies with more than 15,000 employees can save in the neighborhood of $25 million a year by suspending their 401(k) match. When you're talking that kind of money, it's easy to see why it becomes a target in bad economic times.
But potential changes coming from Washington have some companies in limbo. Many companies might not restore the 401(k) match until they find out how much health care will cost them, said Mark Ritter, an executive director at business consultant Grant Thornton LLP.
“Right now there's a lot of fear about what the rules will be and what's the cost,” he said. “The thought is, we may have to rob Peter to pay Paul and, depending on how the health care initiative impacts our company, we might have to get the money from the 401(k) match.”
For companies thinking about tying the match to profitability, simply committing to contributing more to the match in good years and less in bad years is the most flexible option. Another is to promise a certain level of match if the company hits specified profit targets.
That's what cell phone company Sprint Nextel has chosen to do.
The Overland Park, Kan.-based company suspended its 401(k) match as of March in a broader cost-savings plan.
Spokesman James Fisher said the company will make future contributions on a profit-sharing basis.
“If our performance is above ‘X' level, a specified amount of money from the extra performance will go into the 401(k) match,” he said. “If we don't meet that level, there won't be any contributions for this year.”
Sprint Nextel had been matching dollar-for-dollar an employee's contribution up to 4 percent of pay.
Depending on what your company decides, you might see a smaller match. In exchange, the company might put some of the money into a health savings account, workplace improvements, or education and development programs.
The Pension Rights Center, a Washington-based consumer advocacy group, said it's tracking more than 280 companies with suspended or reduced retirement plan company matches. A string of companies began announcing suspensions or reductions in June 2008, and the trend continues.
The list of companies includes widely recognized names such as Sears Holding Corp., Starbucks Corp. and General Motors Corp., as well as nonprofits such as Public Broadcasting Service, the Portland Art Museum and the American Red Cross chapter in New York.
The Pension Rights Center is concerned that retirement benefits may become a casualty of the recession as companies look to permanently reduce costs.
“Unfortunately, we've seen this trend over the past 20 years where companies are increasingly getting out of contributing to their employees' long-term well-being plan, whether it's a pension or retirement income or health benefits,” said Nancy Hwa, the center's spokeswoman.
So, why are companies changing directions now? They've reaped the savings, why not restore the match once profitability returns? It appears one lasting effect of this deep recession is that it's changed the mindset of many business executives, said Ritter.
“People realize that the floor can fall out from under them now and they want to stay loose,” he said.
