Times must be tough when a preeminent 401(k) plan service provider suspends its own 401(k) match. But in March, the Charles Schwab Corp., which holds approximately $101 billion in client retirement-plan assets, did just that. Until then, the stock brokerage firm generously had matched employee contributions 200 percent up to $250, then 100 percent up to 5 percent of pay.
Schwab was plagued by declining revenues. According to its financial statements, annual net income had fallen precipitously--from more than $718 million in 2000 to $109 million in 2002. In the face of such dire numbers, the company began looking to cut costs any way it could, and the size of the potential savings made the 401(k) match vulnerable. Schwab estimates that eliminating the 401(k) match saves $12 million to $15 million per quarter. But the company’s fortunes turned in 2003. In the second quarter of this year, Schwab’s net income jumped to $126 million, a 77 percent increase from the first quarter of 2003 and 29 percent higher than in the second quarter of 2002.
Despite better times, the company has not restored its employees’ match, and seems in no hurry to do so. "Reinstating a 401(k) match remains one of our top priorities, but it’s not a decision we can make based on one quarter’s results," says Glen Mathison, Schwab’s vice president of corporate public relations in San Francisco. Schwab suspended the match in response to a very challenging and uncertain market environment and continued hesitancy among investors, he says. While some of the uncertainty has begun to dissipate, the company still faces the challenge of subdued investor activity, which in turn acts as a drag on revenues, Mathison says.
Schwab’s decision to suspend its match turned heads in the financial world because of the firm’s stature in the 401(k) industry. But it isn’t the only company that has instituted the change. A survey by Hewitt Associates of nearly 500 large employers nationwide representing more than 3 million employees and $253 billion in 401(k) plan assets reports that 4 percent of those companies decreased their match during 2002.
Robert Liberto, a vice president at Segal Advisors in New York, blames the economic environment for the suspension of 401(k) matches and cuts. When the long bull market ended and the economy soured, a host of notable companies, including Ford Motor Co., Goodrich Corp., Goodyear Tire & Rubber Co., CMS Energy Corp. and Textron, Inc., cut or dropped their 401(k) matches. But the economic outlook has improved somewhat in the last quarter, and the stock market seems to have reversed its downward spiral. Despite promising economic news in recent months, there hasn’t been a stampede to restore matches to their previous levels.
Ford Motor Co. suspended its match in January 2002 in response to the effects of the economic downturn on its finances, says Anne Marie Gattari, corporate news manager at Ford. "We’re looking to cut costs and save money wherever we can," she says. Before the suspension, the company was matching 60 cents to the dollar up to 10 percent of compensation. Like Schwab, Ford has no plans to return its match to previous levels anytime soon. "The match will be restored as soon as we can, but there is no time frame at this point," Gattari says. She adds that Ford suspended its match in 1980 for several years, and in the early 1990s for a year. The company will not reveal what it expects to save by cutting its match.
Karen Gousie, communications coordinator for Textron, Inc., in Providence, Rhode Island, defends her company’s decision to cut its match. "As the economy continues to suffer, we have seen other large companies suspend their 401(k) match," she says. "This was a difficult action to take, yet it was called for by the current business environment." Textron manufactures Bell Helicopters, Cessna Aircraft and other products and is an $11 billion company. Its 401(k) suspension took effect with the first pay period in May 2003, and involved 23,221 of its 49,000 employees worldwide. Its match had been 50 percent of the first 10 percent of pay contributed to the plan.
"Textron has taken various actions to help mitigate the continuing softness in our business due to the weak economic environment, including a temporary suspension of our matching contribution to the 401(k) plan," Gousie says. The company won’t discuss estimated savings in eliminating the match, but says that the match will be reinstated in the future. "We do not intend for the elimination of the matching contribution in the 401(k) to be permanent," Gousie says. "We expect to reinstate the match at a later date."
If companies are reluctant to restore their matches after a quarter of good results, when will matches return to their former levels? Fred Reish, an employee-benefits specialist at the Los Angeles-based law firm Reish Luftman McDaniel & Reicher, says that it won’t happen until companies are fully recovered and not just in the early stage of an economic recovery. "It’s one thing to say that things are getting better and quite another to have cash in the bank," Reish says. None of the companies interviewed for this article would commit to a time frame or economic or financial reference point for restoring their matches.
Cutting 401(k) matches is actually nothing new, and historically, employers have not been quick to restore them when the economy started to improve. During the early 1990s recession, a number of companies suspended or cut 401(k) matches. "It was a similar situation. Companies cut their matches in response to an economic downturn but reinstated them when economic growth picked up," says David Wray, president of the Profit Sharing/401(k) Council of America in Chicago, a nonprofit association of companies that provide 401(k) plans. There was a lag between the uptick in economic indicators and the restoration of matches after the last recession as well. "Companies that suspend their matches don’t suspend them in the first year they have a bad result, and they don’t restore the match until after the first year of good results. Restoration lags the actual market upturn," Wray says. If fiscal 2003 turns out to be a good year, then announcements of match restorations can be expected in the spring of 2004, he predicts.
One company that recently cut and then restored its match was General Motors Corp. In March 2001 the company match fell from 80 to 60 cents per dollar contributed by salaried employees up to 6 percent of compensation. Then in January 2002 the match was cut again to 20 cents. In September 2002, after a profitable quarter, the company announced that it would increase the match for contributions made after January 1, 2003, to 50 cents per dollar.
Fluctuations in the match are nothing new to GM employees, says Robert Minton, communications manager for global human resources at General Motors in Detroit. The match peaked at 100 percent in 1980, he says, and has fluctuated ever since. "The auto business is very cyclical," Minton says, "and we like to make sure that the pay programs are in line with how the business is doing. The 401(k) match is just one component of our pay program." There are no hard-and-fast rules that GM follows when cutting or increasing the match, he says, and the determination is made by a benefit-policy group of senior executives.
But while some companies are seeing the return of good times, others are looking to cut their matches even more. Goodyear Tire & Rubber suspended its 50 percent match on the first 6 percent of pay for salaried employees as of January 1, 2003. It’s now trying to negotiate with its unions to cut hourly employees’ match as well. Goodyear had losses of $1.1 billion in 2002. According to government filings, the tire company contributed approximately $37 million to its 401(k) plans for both salaried and hourly employees in 2001.
But Reish believes that even if a company is considering cutting or suspending its match, it likely has put such a decision on hold for now. "Right now companies are in a no-man’s-land as to whether to cut or restore their matches," he says.
Workforce Management, October 2003, p. 71-73 -- Subscribe Now!