Rematch

Many companies that dumped their 401(k) matching contributions are rethinking that cost-cutting move.

CFO’s 2011 401(k) Buyer’s Guide is available as an Excel spreadsheet, with an addendum offered in PDF format. To download the files, click below.

Survey Results (Excel spreadsheet)

Addendum (PDF)

Richard Kelecy wasn’t expecting employees to cheer the news in 2009 that WRScompass, an environmental cleanup and construction firm, had decided to suspend matching contributions to its 401(k) plan. But their reaction still felt like a bucket of cold water in the face.

“The news was not well received at all,” says Kelecy, CFO of the 500-employee company. While the suspension of the 401(k) match was part of a cost-cutting plan that included a two-year salary freeze and an increase to employees’ share of health-insurance premiums, Kelecy says that halting the employer contribution stung in a way that the other cuts did not. “Employees understood that the poor economy could affect their spendable cash,” Kelecy says. “But they were very upset that the hit to their nest eggs came on top of the market losses [their retirement accounts] were suffering.”

Some engineers were upset enough to leave for greener pastures, which is never a good thing given how hard it can be to fill such positions. But Kelecy says a bigger problem may materialize later, if the impact to morale prompts more employees to leave once the economy improves.

To be sure, a 401(k) match is perceived as a highly desirable benefit, which may explain why, even at the cost-cutting peak of the recession, only 15% to 30% of plan sponsors suspended their matches. And studies have found that 50% to 80% of those companies that did suspend their matches have either reinstated them already, at least partly, or plan to within the next two years.

Different Strokes

But history suggests that CFOs will again confront difficult decisions about rescinding and restoring company contributions. In each recession that occurred after IRS Rule 401(k) took effect in 1980, some companies put their matches on hold, notes Edward Lynch, managing director and chief retirement officer at investment-planning firm Dietz and Lynch. That begs the question, Did CFOs learn anything this time around that will help them decide what to do next time?

Kelecy says he did. “We had to do all we could so the company would survive,” he says. “But if presented with the same scenario, I would want to reinstate the match sooner.”

Companies that suspended 401(k) matches, 2008–2010, by industry

 

Even so, WRScompass is moving cautiously. It was scheduled to restart plan contributions on January 1 after approximately two years, but at only 50% of employees’ contributions up to 2% of their salaries, a contribution only one-third the previous level. And even that move was delayed by a quarter, until April 1. “We agonized for nine months about what to do,” Kelecy says, noting that the privately held company’s profit margin is still far from what it was before the recession.

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