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.