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The Challenge of Communicating 401(k) Cuts

April 5, 2009
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Related Topics: Retirement/Pensions, Featured Article, Compensation
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In January, Fran Ruderman, senior director of benefits and compensation at Leviton Manufacturing, was in a position that many benefits managers are finding themselves in these days.

After a series of discussions among top-level executives, the Little Neck, New York-based manufacturer of electronic products decided to suspend its 401(k) match, effective March 1. And it was up to Ruderman to make sure the company’s 3,600 employees understood why it was taking the action.

"This was a really difficult decision," Ruderman says.

Leviton isn’t alone in its decision. A February survey by Hewitt Associates found that 2 percent of employers have cut or temporarily suspended their 401(k) match, while another 5 percent expect to do so in 2009. Up to 10 percent of companies could cut or suspend their 401(k) match in the next 12 to 18 months if markets continue to deteriorate, according to Hewitt.

For HR and benefits managers at these companies, delivering this message can prove to be challenging, experts say. While companies want to make sure they give employees all of the accurate legal information they need about the change, they also want to address workers with compassion, says Suzanne Samuelson, a principal at Mercer.

"At some point things are going to turn around, and when that happens you want employees to feel connected to you," she says. "The better you communicate with them, the more likely they will stay with you in good and bad times."

From the top
While dealing with a 401(k) match cut is the domain of benefits managers, experts agree that the announcement about such cuts or reductions should come from the top leadership of the company.

"This is not the time for leadership to sit under the desk," says Nanette Kress, senior vice president and communications practice leader at the Segal Co., a New York-based consultant. "When changes like this are taking place, it’s important to make sure that people aren’t being left in the dark."

After Leviton’s executives made the decision to cut the 401(k) match, CEO Donald J. Hendler took it upon himself to inform employees.

"Our CEO felt it imperative that communications come from him," Ruderman says.

In late January, Hendler, Ruderman and other senior executives at Leviton put together the letter informing 401(k) participants that the match would be suspended as of March 1. "We said that once business conditions improved, it is our intent to reinstate matching contributions," Ruderman says. Leviton had offered a match of 100 percent on the first 3 percent contributed by employees and 50 percent on the next 2 percent.

A couple days before the letter was e-mailed out to participants, however, Ruderman sent it out to managers and to the company’s 13 HR representatives to make sure that they would be prepared to answer questions and address employees’ concerns. "I followed up with them to let everyone know that if they needed any assistance or help answering questions to come to me or someone else in the corporate office," she says.

Making sure that managers and HR are prepared for a change like this is essential to communicating effectively with employees, experts say.

"The last thing you want is an employee asking a manager about their reaction to this kind of move and the manager saying, ‘How the heck do I know?’ " Samuelson says. "Managers aren’t there as cheerleaders for making the change, but they can be a support network about why such a change needs to be made."

Managers also can be helpful in explaining the business case behind the decision, which is crucial, experts say. Obviously most employees know that the economy is in a recession, Samuelson says. "But employees need to understand that this isn’t simply a way to save money," she says. "It’s about being able to ensure the viability of the business."

If companies are doing this to avoid layoffs, they need to say that, experts say.

When communicating a cut or a reduction in the 401(k) match, employers are required to send out legal information explaining the change. This can be a big stumbling block for companies because legal language is often difficult for employees to understand, experts say.

Ruderman found this to be a particular issue with Leviton employees. After the company sent out the initial e-mail about the 401(k) match suspension, things seemed fine in terms of employee reaction, she says.

"Our employees understand our nation’s economic condition and have acknowledged that many companies have suspended 401(k) matching contributions," she says. "Employees weren’t happy to see the match suspended, but morale was still high."

But two days later, after the company e-mailed a legal notification called a "Summary of Material Modification," Ruderman heard from a number of distressed colleagues.

"I had several employees, including the in-house attorney, contact me and say, ‘I’m just stopping my participation in the 401(k). I don’t get it,’ " Ruderman told attendees of the Pensions & Investments Defined Contribution Conference, in Miami Beach, Florida, in February. Specifically, employees were confused by the language of the document, which was e-mailed without accompanying explanation.

To address employees’ confusion, Ruderman contacted Leviton’s 401(k) plan provider, Bank of America, for help. "We came up with a series of communications campaigns," she says, noting that the company has launched Web-based modules and lunch discussions to talk about the change and the importance of saving for retirement.

The mistake that Leviton and many other employers make is sending out legal information without an explanation, Mercer’s Samuelson says. "You should never send out any of the legal notices without a cover letter explaining the context of the situation," she says.

Ruderman agrees that if she could do anything over again it would be to send out the legal notice with an explanatory note.

Ruderman says she is now continuing to focus on communicating to employees the importance of retirement savings in these difficult economic times.

"I think over-communicating might be better than under-communicating right now," she says

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