401(k) Matches May Be Targeted in Market Downturn
In the last market downturn, in 2001-02, companies hit hardest—such as Ford Motor Co. and Bethlehem Steel—suspended their 401(k) matches to save money.
And while 401(k) consultants say they haven’t yet seen any employers cut their 401(k) matches this time around, they wouldn’t be surprised if some financially distressed companies take this route if the markets continue to drop.
“It tends to be limited to companies in dire financial straits, but it does happen in an environment like today,” said Lori Lucas, defined-contribution practice leader at Callan Associates.
But companies may be more hesitant to cut their 401(k) matches today than they were six years ago, Lucas said.
“A lot of companies have already reduced their retirement costs by cutting retiree health care or their pension plans,” she said. “Today, the 401(k) isn’t just a supplemental retirement savings plan, it is the primary retirement savings plan. Cutting the match on that could be more difficult from a PR perspective.”
Also, under the Pension Protection Act of 2006, companies are granted a safe harbor if they automatically enroll employees in their 401(k) plans and offer a match—another reason companies may resist eliminating their matches, Lucas said.
But not all companies will care about the safe harbor. And companies with automatic enrollment may find that even if they cut their 401(k) match, the participation levels of their 401(k) plans won’t drop significantly, she said.
A recent study by professors from Harvard and Yale universities, titled “The Impact of Employer Matching on Savings Plan Participation Under Automatic Enrollment,” found companies with automatic enrollment that went from a 3 percent match to no match saw participation rates in their plans drop only 5 percent to 11 percent.
However, companies that want to avoid bad publicity may choose to move from a fixed match to a variable match, consultants say.
In the last market downturn, a number of companies took this route, said Lisa Arko, a consultant at Watson Wyatt Worldwide.
“We would not be surprised to see the percentage of plans using discretionary or profit-based matching contribution formulas increase over the next year or two,” she said.