With the economy showing signs of improvement, some of the employers that had cut their 401(k) matching contributions have begun restoring them. Although the total number of companies that eliminated the match was relatively small, it included many high-profile firms in the automotive, energy, financial, high-tech and media sectors.
Employers often perceive their match as a profit-sharing mechanism that can justifiably be reduced or eliminated in difficult times, say observers. And employees, while not pleased with the cuts, generally regarded them as preferable to certain alternatives, such as layoffs.
Nevertheless, companies generally cut their matches reluctantly and have been happy to restore them, they say. "I think a lot of the companies think of the match as something they’re not necessarily obligated to do, but altruistically [it’s] something they feel they should do," says Paul Bracaglia, a partner with the human resources services unit of PricewaterhouseCoopers in Philadelphia. "I do think that companies that have cut their match have done it begrudgingly, and I don’t think they saw it as an easy way to reduce expenses."
Houston-based El Paso Corp., which originally cut its match in March 2003, when it faced liquidity problems, fully restored its program as of July 1, according to a spokeswoman for the energy company. Other companies that have either fully or partially restored 401(k) matches that were cut in recent years include Brooks Automation Inc., Charles Schwab Corp., DaimlerChrysler Corp., Delphi Corp., Ford Motor Co., Lincoln Electric Co., St. Thomas Health Services and Textron Inc.
In addition, both CMS Energy Corp. and U.S. News & World Report have announced plans to reintroduce their matches in January. And General Motors Corp., which started out with an 80 cent match for every $1 contributed by employees, made two cuts beginning in March 2001. Ultimately, GM cut the match to 20 cents for every $1 contributed by employees. The Detroit-based automaker then increased the match in January 2003 to 50 cents, where it has remained since, according to a company spokesman.
Some companies are still making cuts, though. For instance, Pewaukee, Wisconsin-based CIB Marine Bancshares Inc. eliminated its match earlier this year, a spokeswoman says. According to a 2003 survey by Hewitt Associates Inc., only 5 percent of the roughly 500 large companies surveyed eliminated or reduced their 401(k) matches.
"If you look at the companies that cut the match, they tend to be companies who were in cyclical industries, or companies that were entering bankruptcy," says Michael Weddell, a retirement consultant in the Southfield, Michigan, office of Watson Wyatt Worldwide, While some of these companies are now restoring their matches, "they’re being kind of cautious about it," he says. "They want to impress investors that they’ve really restored the company to financial health before they turn around and start to increase their benefits costs again," Weddell says.
Karen Field, Washington-based director of compensation and benefits with KPMG, estimates that about a quarter of her clients that cut their match have since reinstated it, although the rest are discussing it. Some employers consider it a bonus, and have the attitude, "if times are good, I’m going to give you something; if times are bad, I’m not going to give you something," Field says. Bracaglia says he has not seen any movement yet back to restoring the employer match, "but I’ve seen many (companies) talk about it."
Companies that are considering such moves know their employees’ perception is that the economy is doing better, "and they’re fearful if they don’t reinstate the match, it’s going to create some bad will," Bracaglia says. Furthermore, "it’s a competitive posture," he says. Employers are worried that if they do not restore their match, it could put them at a competitive disadvantage in terms of recruiting and retaining employees.
Brooks Automation, which is in the semiconductor industry, cut its match with the understanding that once it was through with a restructuring program and the economic downturn ended, "then we would restore it at some point," says director of investor relations Mark Chung. "We told our employees that it was not a permanent thing." Once the economic environment improved, "We were able to return that 401(k) match to our employees, and, hopefully, going forward we can maintain that," he says.
Observers say employees generally took the cuts in stride. Employees’ attitude "depended on the circumstances," Weddell says. In the automotive sector, for instance, "companies have already done a pretty good job of getting employees to buy into the fact that their compensation is going to vary when they’re in a recession," he says. They have a history of suspending the match in poor times but rewarding employees in good times, he says.
When Brooks Automation of Chelmsford, Massachusetts, suspended its match, "there were a lot of bad things going on at the time, including layoffs," at other companies, Chung says. "I think the majority of the employees understood the reasons why we were doing it. They didn’t necessarily have to be happy with it, but I think they understood the reason."
When Saint Thomas Health Services in Nashville, Tennessee, suspended its match last year, "there was a certain amount of skepticism in some camps. The folks that tended to be negative were negative," says Glenn Carnathan, senior vice president and chief human resources officer. Others, though, recognized that the health care system, which was created by the merger of two systems a couple of years earlier, faced some financial challenges to meet its targets, he says.
As part of a new retirement program, beginning January 1, St. Thomas increased its match to 50 percent for the first 4 percent of employees’ salary, up from the 35 percent on the first 5 percent that it offered before the match was suspended. It has also switched from cliff vesting, in which an employee becomes fully vested in a plan after a certain period of time, to immediate eligibility and vesting, Carnathan says.
"I don’t think there were any surprises" on the part of employees when Tech Data Corp cut its match in 2002, says Leslie Reagin, director of compensation, benefits and employee services for the Clearwater, Florida, company. It was one of the alternatives other companies used as well to avoid reducing head count, she says.
However, cutting the match may have some unintended consequences. Susan Alford, an Atlanta-based senior VP with Aon Consulting, says there are indications that employees, who already fail to save enough to begin with, respond to employer match cuts by reducing their own contributions. The issue is "all wrapped up into just getting employees to save in general," she says. "If there’s no longer the enticement to give up to 6 percent, they drop down to 3 percent, or whatever it takes to do the match. And if there’s no match, they may drop out entirely," she says.
What’s to come?
Observers differ about how employers are likely to treat their 401(k) matches over the next few years.
Weddell, of Watson Wyatt, says that companies are likely to reintroduce matches gradually. "We’re going to see some match increases going forward, but I think it’s not going to be a sudden thing." Companies "just want to make sure they can afford it," he says. However, Field of KPMG says the matching contributions have come back more quickly than she had expected. Companies need it "as way of coaxing people to come to the company," she says.
"The willingness of the company to be generous with company contributions to their 401(k) plans is very much proportional to their need to attract, retain and motivate high-quality workers," says David Wray, president of the Chicago-based Profit Sharing/ 401(k) Council of America. "I believe we’re moving toward a labor shortage, and the companies’ thinking processes are beginning to switch" from making cutbacks to finding ways to retain good people, Wray says. As a result, "I think the future’s pretty bright for company support of 401(k) plans."
But that may depend on the economy. "The lesson that we learned is that this is not a fixed commitment, generally, and that I wouldn’t be surprised to see the matches varying over the business cycle," says Alicia Munnell, director of the Center for Retirement Research at Boston College.
Changes in some employers’ approach to retirement benefits also could play a role. Lori Lucas, defined contribution consultant at Hewitt Associates, notes that some plan sponsors are phasing out their retiree medical and defined benefit plans, or switching to cash balance or other plans. They will look to their 401(k) plans to ensure their employees have an adequate retirement income, she says.
"The trend is likely to be that plan sponsors will consider the match much more viable going forward," she says. "It’s going to be a much harder decision to reduce the match ."
This story originally appeared in Business Insurance, a sister publication of Workforce Management.
Workforce Management, September 2004, pp. 68-71 -- Subscribe Now!