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.
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.
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.”
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.
Finance chiefs say there are many overlapping factors to consider when thinking about 401(k) suspensions, layoffs, and pay freezes on the one hand, and the potential cost to morale and retention on the other. It can’t be boiled down to an equation or formula, says Cal Stuart, CFO at Aquion Water Treatment. Hard cost savings are easy to add up, while the financial impact of a disengaged workforce and the loss of key staffers is more difficult to gauge, but just as real.
CFOs weigh those factors in the light of their own companies’ situations and often reach different conclusions. For his part, Stuart says he leans toward making sure employees remaining after a layoff are rewarded appropriately. (Aquion laid off 25% of its workforce and froze pay a year before suspending its 3% contribution. The contribution had not been reinstated by press time.)
On the other hand, Randy Lay, CFO at Lazydays, a large recreational-vehicle (RV) dealership, says next time he will be quicker to cut employee-related expenses, including head count and salaries, as well as 401(k) expenses. “We hoped the downturn was not going to be as severe as it ended up being, which made us slow on the trigger,” he says. But the company, which saw its revenue decline by 30% in 2008 and 2009, has recovered enough that it is tentatively slated to restore its match to prerecession levels on July 1.
At publicly held MarineMax, a dealer of recreational boats and yachts, the recession took a serious toll. Revenue plunged from almost $900 million in 2008 to half that amount in 2010. But the company did manage to attain positive cash flow as last year wore on, and its suspended 401(k) match was partially restored late last summer.
MarineMax CFO Mike McLamb says he has learned from the experience that companies should diligently avoid letting nice-to-have but less-than-crucial expenses creep back in as times get better. But he doesn’t include the matching 401(k) contributions in that category. “It’s an important thing,” he says. “We’ll pull other things out of the expense structure before that.”
Depending on the industry, some employers may have fewer concerns about the retention issues involved in cutting benefits. For example, the RV industry, like many targeting high-end customers, was severely depressed during the recession. On top of that, for Tampa-based Lazydays, was the fact that the unemployment rate in Florida has remained several points above the national average.
“The only places an RV technician or salesperson can go are to the auto industry — and you know what has been going on there — or to another RV dealer,” says Lay. Some people did go looking, he adds, but they found few jobs available.
To help employees make the most of their existing 401(k) savings, The Hartford is advising its clients to encourage plan participants to plow the savings from this year’s two-percentage-point reduction in the Social Security tax into their 401(k) accounts. Thomas Foster, national spokesperson for the company’s retirement plans group, says plan sponsors should also advise low-paid workers — many of whom don’t sign up for 401(k) plans — of the Internal Revenue Service’s Tax Saver’s Credit. The program allows those earning $33,000 or less to claim a credit for a portion of their contributions. In his recent talks with CFOs, Foster says he has found few who are aware of it.
But such measures will mean little if the economy takes a turn for the worse. Should that happen, employees may be even more disgruntled if employers once again tinker with their retirement benefits. “One thing employers will find out is that they can play that card only so often,” says Bill McClain, a principal at Mercer.
Still, the next time company survival is in question, CFOs will likely subject 401(k) costs to fresh scrutiny. Says Aquion’s Stuart, “As painful as it was, I think we made the right moves. I just hope to never have to make them again.”
David McCann is senior editor for human capital and careers at CFO.
Amid the turmoil of the recession, the environmental engineering firm WRScompass suspended its 401(k) match two weeks before a scheduled conversion to a safe-harbor 401(k) plan, having already incurred all the legal and consulting costs associated with that move.
Under safe-harbor rules, if a plan sponsor gives all participants a contribution equal to 3% of their pay, it is exempt from having to pass the Internal Revenue Service discrimination test that determines whether highly compensated employees are making disproportionate contributions. A plan sponsor that fails the test must make taxable “corrective distributions” to the high-earning employees.
Getting the exemption was important to WRScompass because so many of its employees are engineers in the “highly compensated” category — earning more than $110,000 a year. The IRS says that such individuals can contribute, on average, no more than two percentage points of their pay above what the average lower-compensated employee contributes.
If the latter’s figure is 3%, the highly compensated staffers are limited to 5%. For someone making $110,000 a year, that’s $5,500 — almost $11,000 less than the government otherwise allows.
Yet WRScompass, observing the plunging economy’s effect on its business, canceled its move to a safe-harbor plan anyway, to avoid having to pay all employees the 3% match. Many of the highly skilled engineers who subsequently left were likely frustrated by their limited ability to save for retirement, CFO Richard Kelecy surmises.
The IRS test is an issue for a lot of companies. Of approximately 3,000 plans with potential compliance risks that The Hartford has reviewed, more than half have made corrective distributions, says Thomas Foster, national spokesperson for the company’s retirement plans group.
Meanwhile, companies face new compliance challenges regarding plan fees and how they must be disclosed to participants. For more on the requirements, looming deadlines, and harsh penalties that may result for companies that fail to comply, see A Sense of Disclosure.” — D.M.
As companies make a strong push to restore matching 401(k) contributions, it’s worth remembering that there are technical requirements that must be heeded. According to attorney Carol Buckmann of law firm Osler, Hoskin & Harcourt LLP, following these guidelines can help companies avoid future audit problems or the need to file under a voluntary correction program.
• If a company resumes a matching contribution midyear, it will have to do discrimination testing of both employee and matching contributions for the current plan year.
If a company suspended contributions under a safe-harbor 401(k) plan, it can’t resume a safe-harbor matching contribution midyear. Employers can resume safe-harbor status by sending out a new safe-harbor notice before the next plan year starts.
• If a company is not sure about the level of match it can ultimately pay, it could adopt a discretionary matching provision, with or without a guaranteed minimum match, and determine the total match (if any) before the end of the plan year. It could also require that contributions be made only from profits. However, a plan won’t meet the safe-harbor requirements if it has a purely discretionary match. There are other restrictions if safe-harbor matching contributions exceed the required match.
• Contributions must be allocated to the correct limitation year to avoid violating Section 415 maximum-contributions limits.
• Deductions can’t be prefunded by basing contributions on compensation not yet earned by participants.
• Employees must be notified promptly of any change to the employer-contribution rules.