Faced with increasing economic uncertainty, a Las Vegas gaming company and one of Utah’s largest employers became the latest companies to suspend their 401(k) matching contributions as a cost-cutting move.
Station Casinos Inc. and the Salt Lake City-based Intermountain Health Care System last week joined carmakers General Motors Corp. and Ford Motor Co., real estate firm Cushman & Wakefield and Frontier Airlines, which had announced in November they would temporarily halt their matching contributions to their companies’ 401(k) plans.
While the vast majority of employers likely will resume their corporate matches when the economy improves, some, like Ford, may do so with lower contributions, benefit consultants say.
In 1994, Ford’s match was 60 cents per $1 contributed by employees up to 10 percent of base salary, but in 2004, after a 2½-year suspension, the match dropped to 60 cents per $1 contribution up to 5 percent of base salary, a company spokeswoman said.
When the boom of the late 1990s faded, the average employer match fell from 3.3 percent of earnings in 1999 to 2.5 percent in 2001, according to the Center for Retirement Research at Boston College.
Today the average employer match is 3 percent of earnings, according to David Wray, president of the Profit Sharing/401(k) Council of America in Chicago. Although employers are not obligated to make contributions to 401(k) plans, 80 percent match employee contributions, while 75 percent of the other 20 percent make some other contribution, such as company stock, he added.
But the reduction or suspension of a company match, coming at a time when average 401(k) balances already are being hammered by stock market declines, could discourage workers from continuing to make their own contributions, retirement plan experts warn.
And if too many employees at the lower end of the pay scale stop making 401(k) contributions, the plan could fail Internal Revenue Service nondiscrimination tests, retirement plan experts point out. Those tests are run to determine that contributions by highly compensated employees don’t exceed contributions by rank-and file employees by an amount set by law. Highly compensated employees are defined as those who earn $105,000 or more annually.
To prevent such a scenario, experts urge employers that suspend their 401(k) matches to continue and perhaps even increase benefit communications and education to encourage employees to save so they are financially prepared for retirement.
According to a survey of 248 employers conducted in October by Watson Wyatt Worldwide, 2 percent said they either had reduced or suspended their 401(k) and 403(b) matching contributions, while 4 percent said they planned to make similar moves in the next 12 months.
“It’s not like there’s a groundswell, but some employers are either cutting back or suspending their 401(k) matches,” said Robyn Credico, national director of defined-contribution consulting for Watson Wyatt in Arlington, Virginia.
“Literally, in the last couple of weeks, we have seen more plan sponsors inquire about the implications of cutting or eliminating their match,” said Eric Levy, worldwide partner and retirement business leader for Mercer’s outsourcing business based in Norwood, Massachusetts.
The topic of scaling back 401(k) matches usually arises during discussions about reining in overall human resource costs, according to Marina Edwards, a senior consultant at Towers Perrin, based in Madison, Wisconsin.
Employer response was similar during the recession of the early 2000s, according to Pamela Hess, director of retirement research at Hewitt Associates in Lincolnshire, Illinois. She estimated 5 percent of employers sponsoring 401(k) plans suspended their corporate matches for anywhere from six months to two years between 2001 and 2003.
While for many employers, cutting the 401(k) match may be necessary to avoid layoffs or stay in business, “one of the potential dangers of cutting the match is employees might stop participating,” warned Julie Stitch, senior information/research specialist at the International Foundation of Employee Benefit Plans in Brookfield, Wisconsin.
Already, 4 percent of U.S. workers have stopped contributing to their 401(k) plans in response to recent market losses, according to Hewitt.
“The changes started in October,” when the average 401(k) balance slipped 14 percent to $68,000 from $79,000 at the end of 2007, according to Hess. “While it’s not a huge move, it’s a lot for one month.”
Because lower-paid workers are more likely than those who are highly compensated to stop making 401(k) contributions, some plans may fail nondiscrimination tests, forcing employers to return contributions to the highly compensated, “which can be administratively difficult,” Stitch pointed out.