An increasing number of companies are saving millions of dollars by suspending their employer 401(k) match in response to cost pressures, according to Hewitt Associates. For obvious reasons, the move is not without controversy. Research suggests the effects of doing so can inflict lasting damage to the retirement savings of employees.
According to Hewitt’s analysis, companies can save, on average, more than US$1,500 per employee each year by suspending their 401(k) match (assuming the average employer match is 50 cents to the dollar up to 6% of pay). This could resulting in savings of up to $25 million for a typical large U.S. company, more than $10 million for the average mid-sized company, and $2 million for the average small company, annually.
While this is good news for a company’s balance sheet, the effect on employee contribution rates is far less helpful. Once the match is suspended, employees may reduce or halt their own 401(k) contributions entirely, shrinking their retirement savings by thousands of dollars due to that one-year suspension.
Hewitt contends that a younger worker earning $50,000 a year who contributes 6% of his or her salary will have $16,000 less for retirement than what they would have had if their employer hadn’t suspended its match for one year. That number jumps to $48,000 if the employee also stops contributing.
Additionally, many workers who follow their employer and stop contributing to their 401(k) don’t immediately resume contributing once their employer reinstates its contribution. Hewitt says that a pause of just a few years can still deplete retirement savings by hundreds of thousands of dollars.
“Companies are making difficult decisions to keep their bottom line in the black, and the employer 401(k) match is one of the costliest retirement expenditures they sustain in a given year,” says Pam Hess, Hewitt’s director of retirement research. “Cutting this benefit to reduce costs is a much less drastic action than eliminating jobs or reducing salaries.”
“However, suspending the match has a significant impact on employees,” she continues. “Not only does it dissuade many workers from saving in their 401(k), but it also adversely affects their ability to save enough to retire. We believe employers should suspend their match only as a last resort.”
Hewitt suggests that there are alternatives employers can pursue. Instead of cutting 401(k) matches completely, a decrease in the contribution match will help to balance the need to cut costs while minimizing the effect on employee retirement savings. Communicating exclusively through online means can also help, as it allows employers to effectively reach their employees while saving money on paper costs. Finally, employers should take a closer look at the funds offered in their 401(k) to ensure they do not carry high expense ratios, as Hewitt’s research indicates that additional annual expenses of 0.25% can reduce projected retirement income substantially over time.
To comment on this story, contact us.