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A Bad Economy Doesnt Dampen Auto Increase in 401(k) Plans

February 17, 2009
Despite the equity market’s turmoil and the faltering value of some retirement portfolios, many employers with defined-contribution plans are nevertheless discussing automatically increasing employees’ contributions to their plans, according to speakers and attendees at Pensions & Investments’ Defined Contribution Conference.

It’s more important now than ever for companies to implement automatic increases in their 401(k) plans, said Jaime Erickson, HR manager of DC plans at Akzo Nobel, a Chicago-based chemical company with 12,000 employees. Erickson was a speaker at the conference, which took place in early February in Miami Beach, Florida.

"When you look at people who have a 3 percent default, they will just sit there," she said, failing to invest enough to build a retirement fund. In April, Akzo Nobel will automatically increase its employees’ contributions to the 401(k) plan up to 6 percent of pay. The company offers a 6 percent match and has no plans to freeze it.

However, even companies that have decided to suspend their 401(k) match for employees are considering automatically increasing the contribution for employees. Leviton Manufacturing, a Little Neck, New York-based producer of electrical and electronic products with 3,800 employees, is suspending its 401(k) match as of March 1.

"This was a very difficult decision for us," Fran Ruderman, senior director, benefits and compensation, said in an interview following her presentation at the conference. The company matched 100 percent of the first 3 percent of an employee’s contribution, and 50 percent for the next 2 percent. The company also has implemented a salary freeze.

But despite these moves, Ruderman is considering adding an auto increase feature to the company’s 401(k) plan so that employees can be on track to save enough for retirement.

"I have to really think about this," she said. "On one hand, we have lots of hardship withdrawals, but on the other hand, we want to keep employees on track with their savings. And they can always opt out."

Many plan sponsors are discussing automatically increasing employees’ contributions despite the market environment, said Joe Masterson, senior vice president of Diversified Investment Advisors, a service provider based in Purchase, New York. They’re even choosing the option over automatic enrollment, he said in a discussion over lunch. Companies are wary of auto-enrolling employees at this moment in the downturn because the employer match for all of those employees costs companies money.

The dilemma that Leviton Manufacturing is struggling with—cutting or freezing the employer contribution while simultaneously investing more of employees’ money so they won’t fall behind in retirement saving—is one that many plan sponsors face, particularly as more and more suspend their company matches, experts said. Some attendees at the conference said they believe that the number of employers planning to freeze their match is greater than industry surveys indicate.

A recent Hewitt Associates survey shows that just 2 percent of employers have cut or temporarily suspended their 401(k) company match since the markets tumbled last fall, and 5 percent are suspend or cut their matches in 2009. However, depending on how long the recession lasts, Hewitt estimates that 10 percent of companies could cut or freeze their match in the next 12 to18 months.

But Don Stone, president of Plan Sponsor Advisors, a Chicago-based consultant, said he has seen greater numbers of companies cutting their matches. "We have clients who three months ago were not going to cut the match, and now they have," he said in an interview at the conference. "Twenty percent of clients have cut or stopped their match completely in the past four months."

But these clients shouldn’t abandon the idea of adding auto increase—even if they are cutting the match, Martha Tejera, a principal at Tejera & Associates, said in an interview. "The message is, ‘You own your retirement, and here is a way to make it up."