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Tough to Cut the Beloved 401(k)

September 9, 2001
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Related Topics: Benefit Design and Communication, Retirement/Pensions, Featured Article
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T hey say that Social Security is the "third-rail" of American politics. Any politician who tries to touch it does so at his or her peril. Retirement plans are, in many ways, the third-rail of HR benefits. A 401(k) used to be a nice thing, but now many employees consider it an entitlement, and messing with the formula doesn't sit well with the workforce.

Nothing going on in the economy suggests that the trend away from defined-benefit (traditional pension plans) to defined-contribution plans such as 401(k)s will slow. After all, the circumstances that led to the movement in first place -- regulatory costs of defined-benefit plans, a more mobile workforce, and more employee decision-making autonomy -- haven't changed.

The economic uncertainty is likely to accelerate this trend, if anything. Since defined-benefit plans require that a certain benefit be paid in the future, it can be a bigger risk for the employer. A bad economy is not a good environment for taking risks, thus creating an incentive for a company to move to defined-contribution.

It's rare for employers with defined-contribution plans -- 401(k), 457, or 403(b) -- to make changes to a plan during tough times. Employer matches, waiting periods (before new employees can join the plan), and vesting periods aren't prime areas for cuts.

"Overall, employers are staying the course," says David L. Wray, president of the Profit Sharing/ 401(k) Council of America. "And they have through previous slowdowns. The fixed matches are serious company expenses, but companies haven't changed the plans. They'd lay people off first."

"It's a very powerful benefit for us," says Connie Russell, Sun Microsystems' director of total pay and rewards. "We'd rather not touch that." Sun matches 100 percent of the first 3 percent of an employee's contribution, and 50 percent on the next 2 percent.

Despite the risks, there still are some ways to trim 401(k) costs:

The variable match: One cost-cutting option is to move from a fixed match, like 50 cents on the dollar, to a variable match, based on company profits. Lucent Technologies had a match of 66 2/3 cents on the dollar, and three years ago moved to a 50-cent match. At the same time, the company added a variable component, so employees shared more in company profits. During the first year, the variable match was more than $1. The second year, it was about 84 cents. Last year, it was zero.

For those plans with fixed matches, the most common match is 50 cents for each employee's dollar. In 1999, 49 percent of employers matched 50 cents, according to the Profit Sharing/401(k) Council of America. Another 21 percent of employers matched a full dollar, and 18 percent matched 25 cents.

Look behind the numbers: When comparing your 401(k) plan to your competitors', look behind the numbers. When your competitors say they match 75 cents of an employee's compensation, what do they define as compensation?

Many employers -- about 79 percent of those with 50 to 199 employees -- include overtime in the definition of compensation for the purposes of calculating their match. Another 40 percent include bonus payments, and 39 percent include commissions. The end result: Depending on how you define compensation, you could be matching a much smaller amount than your competitors, or a much larger amount.

A final warning: Wray, of the 401(k) council, notes that it's still a tight labor market for quality workers in most cities, and it's no time to cut down on a popular recruitment/retention benefit. "You don't have that kind of flexibility. Anything under 5 percent unemployment means as an HR person you have to scrape to get new people."

Average 401(k) Employer Matches

IndustryMatches
Per $1
Max %
Matched
Durable Goods.545.7%
Non-Durable Goods.535.8%
Wholesale/Retail.515.5%
Financial/Insurance Real Estate.615.4%
Services.555.0%
All Plans.565.5%


Salary & Benefits Studies:

Deloitte & Touche
2000 Annual 401(k) Benchmarking Survey
Profit Sharing/401(k) Council of America
Annual Survey of Profit Sharing and 401(k) Plans
Employee Benefits Research Institute
Several Reports on retirement and other benefits

 

Workforce, September 2001, pp. 42-44 -- Subscribe Now!

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