Pensions are dying, stock options are dead; bonuses and health-care plans are looking more anemic by the day. Of the portfolio of employee benefits, only the 401(k) remains robust.
Companies have long recognized that when it comes to getting employees to participate in a plan, what counts most about the 401(k) is the size of the employer match. But with the future of Social Security suddenly uncertain, the employer match also acquires a moral dimension. For many people, the matching contributions will make the difference between an uncertain and a sound retirement. In a study released last summer, Hewitt Associates found that for the typical employee, more than half of retirement income is projected to come from 401(k) savings.
Employers are not insensitive to this point. In fact, a CFO survey of finance executives found that the top concern about 401(k) plans is that employees may not be able to retire comfortably.
The historic benchmark for employer contributions is 3 percent of employees’ pay, according to David Wray, president of the Profit Sharing/401(k) Council of America in Chicago. However, some companies, pressed by hard times, backed off their commitments to contribute to their employees’ 401(k) plans. During the past few years, corporate giants such as Ford Motor, DaimlerChrysler, Delphi, and Charles Schwab (which administers 401(k) plans for other firms) announced that they were slashing or entirely ditching their matching programs, creating uncertainty about the corporate commitment to providing for employee retirement.
San Franciscobased Charles Schwab & Co., which made its matching contributions to 401(k)s on an annual basis, suspended its match for 2003. At the time the program was suspended, “we were trying to institute as many expense reduction measures as possible that would allow us to avoid layoffs,” says spokesman Glen Mathison. (Ultimately, the company downsized anyway.) Schwab promised to restore the matching and did so in 2004 at presuspension levels: $2 contributions for each dollar of employee contribution up to $250; after that, dollar for dollar up to 5 percent of eligible pay.
In 2002, Ford suspended its contribution of 60 cents for each worker dollar contributed to its 401(k) plan, up to 10 percent of pay. It, too, reinstated its matching program last year, but at a reduced level of 60 cents on the dollar up to 5 percent of pay. For Ford, suspending its match was nothing new. “We’ve suspended the match three times in the history of the plan,” says Lee Mezza, the company’s director of employee benefits. “It’s only in circumstances where we’ve been under significant cost pressures that we’ve made the decision to suspend the company match. And that’s not a decision that’s made very lightly.”
Certainly not. As any good investor will warn, it’s important to make contributions in good times and bad—especially in bad times, when equities can be had at a discount. Moreover, inconsistency in a matching program can reduce participation. “When we saw plan sponsors eliminate or reduce their match because they were under financial distress, we found that once they were able to reinstate the match, it was very difficult to get people to participate again,” observes Lori Lucas, director of participant research at Hewitt in Chicago.