First the Market Slump, Now Some Savers Losing 401(k) Match Funds
Some companies are cutting back on one of American workers’ prized benefits: matching contributions to their 401(k) retirement savings plans.
DaimlerChrysler’s U.S. unit, the Wyndham International Inc. hotel chain and Bethlehem Steel Corp. are among a smattering of financially stressed companies across a range of industries that have suspended their matches to conserve cash in recent months as the U.S. economic downturn has deepened.
These cutbacks have not been widespread, but some analysts warn that more firms could follow suit if the U.S. slips into severe recession.
Losing matching retirement contributions from their employers could add another hardship for workers who, in many cases, were already enduring reduced 401(k) balances as the U.S. stock market crumbled over the last 18 months. For many workers, a 401(k) is the only retirement plan they have, financial planners note.
“What people are being reminded of is that 401(k) plans are really profit-sharing plans,” said David Wray, president of the Profit Sharing/401(k) Council of America, an association of 401(k) plan sponsors. “Company contributions [to 401(k) plans] depend on profitable results.”
When the economy was booming in the late 1990s, many companies were able to raise their contribution levels. But now that times are tight, some employers have had to reduce or suspend the payments, Wray said. Often these cutbacks are part of a broader cost-saving initiative addressing everything from salaries to travel budgets to charitable giving.
An estimated 45 million Americans, or nearly half of the full-time private U.S. work force, save for retirement through 401(k) accounts, according to financial consulting firm Cerulli Associates.
The plans, named for the section of the U.S. tax code that created them, let workers invest in stock, bond and cash instruments, deferring taxes until money is withdrawn in retirement. By investing pretax dollars, savers also can cut their current taxable income.
About 98% of 401(k) plans offer a company match of some kind, although the amounts vary, according to Hewitt Associates, a benefits consulting firm. For instance, some employers match 25 cents on the dollar for the first 4% of pay contributed--or up to 1% of salary. Others match dollar-for-dollar up to 8% of salary. Still others provide an annual match linked to company results.
Matching contributions, which may be made in cash or in company stock, can give 401(k) savers a major boost. Financial planners liken them to “free money,” saying investors should always invest at least enough to take advantage of the full match, if not the maximum investment allowed by law (currently $10,500 a year, but heading higher in 2002).
Despite their importance to savers, company 401(k) matching contributions were sliding even before this year because of the faltering economy, according to the Profit Sharing/401(k) Council. In 2000, the average 401(k) plan matched 2.5% of participants’ pay, down from 3.3% in both of the previous two years and the lowest level in at least a decade.
Many retirement experts say they don’t expect the trickle of 401(k)-match cutbacks to turn into a flood. But some analysts say the decision this month by DaimlerChrysler’s Chrysler unit to suspend its 401(k) match for salaried workers next year could be a harbinger of things to come.
Nicholas Lobaccaro, an analyst at Lehman Bros., said he expects Ford Motor Co. and General Motors Corp. to follow Chrysler’s lead as the Big Three seek to revive profits, and he suggested that large employers in other industries might take a hard look at their 401(k) matches as well.
“This is a sign of the times,” Lobaccaro said. “Budgets everywhere are being scrutinized from top to bottom, and 401(k)s are part of that process. Basically, everything is on the table now.”
GM, which in March trimmed its match for salaried workers to 60 cents on the dollar for the first 6% contributed, down from 80 cents, had no comment on possible further changes to its 401(k) plan, said spokesman Tom Wickham. At Ford, “everything is on the table, but we have not made any decisions or announcements,” said spokeswoman Anne Marie Gattari.
Companies that have suspended their 401(k) match in recent months, or announced plans to do so, include Telect Inc., a telecom products maker in Liberty Lake, Wash.; Perceptron Inc., a Plymouth, Mich., maker of process-measurement systems; U.S. News & World Report, the Washington-based magazine publisher; and Radiant Systems Inc. of Atlanta, which makes computer systems for retailers.
Firms that have suspended their match call it a less-brutal alternative to more layoffs, and they emphasize that the moves are meant to be temporary.
“It comes down to saving a certain number of jobs versus cutting the overall compensation package for everyone,” said Wray of the Chicago-based Profit Sharing/401(k) Council. “These are not exactly win-win decisions.”
As Darcie Brossart, spokeswoman for Dallas-based Wyndham, put it, “It isn’t something we take lightly. We were trying to find an avenue to cut operating costs that didn’t immediately affect our employees’ ability to pay their mortgages or their other bills.”
In the wake of the Sept. 11 terrorist attacks that hobbled the travel industry, Wyndham suspended the match for its 9,000 participants and ceased enrolling new workers automatically in the 401(k) program, among other measures, effective Oct. 1. Brossart said the company hopes to reinstate the match by mid-2002 “at the latest.”
For now, at least, companies like Chrysler and Wyndham are the exception, major administrators of 401(k) plans say. Few, if any, of their clients are cutting back on their company matches, they say.
At Vanguard Group, for example, only one of the 1,300 plans that the Valley Forge, Pa., company administers has suspended the 401(k) match so far this year, said Ellen Rinaldi, head of executive benefits. Rival Fidelity Investments also said it has seen no trend toward cutbacks.
“Given that companies have sold the idea of 401(k) plans as an important benefit, I honestly think they will do a lot of things before they touch the plan,” said Larry Stahly, an consulting actuary with benefits firm Buck Consultants. Still, he added, “If the economy sinks deeper in the coming months, there are no guarantees.”
Financial planners recommend that workers keep contributing to their 401(k) if possible, even if their match is suspended.
“You still lower your taxable income,” said Laura Tarbox, an advisor in Newport Beach. “Just be sure to remind the company to reinstate that match when things turn around, so they don’t forget.”
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The Impact of Free Money
Company matches can help 401(k) balances grow much faster. Here’s how “match money” would affect a worker making $75,000 a year and contributing 6% of pay, or $4,500 a year, to a 401(k) account that earned an average pre-retirement return of 8% annually.
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With 50% With no company match company match Savings after 20 years $331,323 $220,883 Savings after 30 years $838,327 $558,885 Monthly withdrawal during retirement* $5,026 $3,351
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* Assumes 6% annual gains during retirement and zero balance at end of 30-year retirement
Source: Times research
