Stopping 401(k) Matches: The New No-brainer

At least 40 employers have stopped contributing to their employees' defined-contribution plans.

On a day like Monday, when five big companies reported a total of at least 57,000 layoffs, it was easy to see why CFOs might want to stop providing a match to employees’ 401(k) savings. In many cases, it’s an easy way to cut a cost worth 2 percent or 3 percent of your payroll without having to give employees more than a week’s notice.

What’s more, cutting out the matching funds an employer contributes to a 401(k) wouldn’t be unexpected in these tough times. And in lieu of a layoff, the elimination of the match can seem almost merciful.

A fast-rising group of big-name companies have taken the hint. Stretching from last June until January 26, 40 employers have announced plans to change or cease their 401(k) matches, according to a non-comprehensive list put together by the Pension Rights Center, a nonprofit consumer-rights organization. And that’s a smaller population than the companies that actually have done it, notes Alan Vorchheimer, a defined-contribution-plan adviser with Buck Consultants in New York City, who says he knows “companies where it doesn’t get out to the media because it’s part of a bigger financial restructuring.”

In comparison to other ways of cutting costs, “this is just so easy,” says Vorchheimer. “It’s just right there. It’s one decision. You pretty much can estimate the amount [you'll save]: You can look at your payroll and look at what you contributed last month.”

While there are many variations in matching formulas, an employer pay-in of 50 percent up to the first 6 percent of payroll that employees contribute is increasingly considered the standard. Since it’s unlikely that every employee will contribute to the plan and such forms of compensation as bonuses and overtime pay may be excluded as a basis for employer contributions, a typical plan sponsor ends up paying out 2 percent to 3 percent of payroll, the consultant figures. Further, most plan sponsors can revoke the match with no advance notice, he says. One exception: Employers operating under certain IRS “safe harbor” rules must give their employees 30 days notice of a change in matching policy.

Often, recent match suspensions have come buried under piles of more drastic cost-cutting measures. In a December 18 press release reporting on FedEx’s second-quarter earnings, for example, the shipping company said it was suspending 401(k) company matching contributions for a minimum of one year. That was the last item in a bulleted list that also included layoffs, a hiring freeze, cuts in labor hours, and executive pay cuts. More recently, Saks Inc. announced such a suspension in tandem with 1,100 job cuts and a freeze in merit raises.

Sometimes, news of a 401(k) match cut precedes the issuance of a company’s 10-K or 10-Q and doesn’t make it in. On December 24, for instance, Starbucks said in a letter to employees that it would make its automatic matching plan discretionary, The Wall Street Journal reported. The newspaper noted that the coffee company’s routine match was between 25 percent and 150 percent of the first 4 percent of eligible workers’ pay, depending on length of service.

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