Organizations Reconsider 401(k) Plan Matching Contributions for Employees

(June 25th, 2009)

Due to the current economic downturn, most organizations are reconsidering their matching contributions to employees’ 401(k) plans. In fact, it is estimated that every 1 out of 4 companies have temporarily suspended matching contributions for their employees’ 401(k) plans. These companies say however once the economy improves and so does their cash flow, they will reinstate 401(k) matching contributions for all employees. This piece of news comes from a latest survey done by the Charles Schwab. Among list of companies who have suspended 401k matching include Sears Holdings, Starbucks, Kodak and Hewlett Packard (HP). A recent survey conducted by Watson Wyatt shows that 50% of large organizations that suspended 401k matching for employees plan to reinstate the program within 12 months. Only 5% of organizations responded they don’t plan to reinstate 401k matching.

While this is positive news, most organizations are considering changing the final % of matching, or the way the calculations are done. Below we outline a list of possible changes that Actuaries are considering to 401(k) matching payments.

i) Increase Payments for Retiree Care – Many companies are considering cutting back on their 401(k) match to be able to fund more towards health savings and other tax-efficient retirement accounts for retired workers says Virginia Olson, a Retirement Benefits Consultant at Towers Perrin (a global firm specializing in human capital and risk management, actuarial and retirement consulting). It is estimated that only 13% of retired workers will have enough savings to fund for their health care during retirement, says the Employee Benefit Research Institute (EBRI). Olson thinks this method would be a "great recruiting tool for midcareer hires."

ii) 401(k) Matches Based on Profits – Most companies match 50 cents on each $1 contributed to a 401k up to 6% of total salary. Most of the 50% of organizations that said they plan to reinstate their 401(k) matches within 12 months said they will recalculate their matching percentages by taking in to account net income & profits the company has made in the last 3-4 quarters.

Important Facts about 401(k) Matches

According to a financial analyst at Hewitt Associates, large corporations can save about $25million each year if they abandon or eliminate 401(k) matching contributions for their employees. However, 96% of all executives argued that a 401(k) match is an important feature of their 401k plan. Executives and management say they have a harder time recruiting good talent if their companies do not match 401k contributions by employees. Most employees look at health benefits provided by a corporation as well as 401(k) matches before they join a company.

Survey Results of Companies that Plan to Reinstate 401(k) Match

Here are the percentage results of companies that plan to reinstate their 401(k) matches.

Source: Watson Wyatt's Effect of the Economic Crisis on HR Programs survey of 179 HR executives (June 2009).