Many companies resume 401(k) matches
Thursday, November 3, 2011
DES MOINES, Iowa (AP) — Few areas are spared when it comes to corporate belt tightening. During the economic downturn, employees felt the impact of cutbacks in hiring, raises, and even contributions to their 401(k) plans.
The first wave of reductions in 401(k) plans began in 2008. The number of employers lowering or suspending their contributions accelerated in the first half of 2009 as the stock market fell to its lowest point after the financial meltdown.
In new research released Wednesday, business consultant Towers Watson analyzed the action of 260 mid- to large-sized companies. It shows that 75 percent of those that took the step to cut costs in their retirement plans have resumed making 401(k) contributions. Among those:
• About 74 percent are continuing payments at the previous level;
• About 23 percent resumed making contributions to their employees’ accounts, but at a lower rate. Among these companies, the new contribution level was slightly more than half of the original amount; and
• Just 3 percent resumed making contributions at a higher rate; however, in all but one case the increase was associated with the company freezing or ending its pension plan. The higher amount was intended to make up for some of the lost pension plan benefits.
“It’s encouraging that employers are reinstating the match and are still committed to helping people save for retirement,” said Robyn Credico, a senior retirement consultant at Towers Watson.
To be sure, companies also have an interest in encouraging workers to save enough. The stock market’s impact on retirement savings has resulted in many workers being forced to stay on the job rather than retire. And that’s not always in an employer’s best interest, Credico said, because those workers often are there because they have to be, not because they want to be.
Employer matching contributions are a strong enticement to get workers to save money for retirement. A study by the Profit Sharing/401(k) Council of America, a Chicago-based trade group, indicated in 2009 that nearly 73 percent of 401(k) plan sponsors that suspended matching contributions in the recent recession experienced a drop in participation.
Although there was an increase in the number of employers that reduced or cut their matches during the financial crisis, they represent a minority of 401(k) plan sponsors. Another Towers Watson survey indicated that overall, about 13 percent of companies suspended their match during the recent downturn.
Most employers match 50 percent of employees’ salary deferrals, up to 6 percent of pay, which amounts to a match of about 3 percent of pay. Companies save 1 to 2 percent of their payroll costs by cutting the 401(k) match.
The median amount of time contributions were suspended was 12 months.
Some industries have bounced back faster than others. Companies in manufacturing and health care resumed making contributions at the highest rate, some 88 percent.
With the exception of the publishing, financial and entertainment industries, the percentage of companies resuming payments exceeded 70 percent for all sectors.
The percentage of publishing companies reviving their 401(k) contributions was 62 percent; it was 53 percent in the financial sector. Companies in the entertainment industry trailed the pack, with just 50 percent resuming their payments.
Of the 260 companies surveyed, 29 reduced their match instead of suspending it outright. About a third of those have since reinstated their original match.
Towers Watson said the slow economic recovery prompted some employers to take their time to begin making 401(k) contributions again. Its analysts also believe recent economic turmoil and fears of a double-dip recession could result in more companies suspending the match again.
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