Most Employers Restore 401(k) Matching Contributions

Finally some good news for workers with 401(k) plans: Most of the companies that suspended their 401(k) matching contributions during the Great Recession have restored them.

A recent Towers Watson (NYSE; TW) study of 260 companies found that 75% of companies that suspended or reduced their 401(k) matching contributions to help cut costs have reinstated their contributions.

Global professional services company Towers Watson reported that suspensions occurred from January 2008 through January 2010, although 83% of the cutbacks happened during the first half of 2009.

Out of the 75% of companies that restored their 401(k) matching program, 74% reinstated them at their previous level, with 23% of companies matching at a lower rate.

Marina Edwards, senior consultant of benefits advisory & compliance with Towers Watson, says that employee complaints were a main reason companies reinstated their programs.

"When matches were suspended, most employees understood the company’s financial pressures and would have rather seen a reduction in 401(k) matching than lose their jobs, but when the economy turned around, they became more vocal,” says Edwards.

She also cites companies’  belief in “shared responsibility” for employee’s retirement savings, and the fear they will lose workers as other reasons why plans have been reinstated.

“At a certain point, a company has to be competitive to retain their skilled work force. Companies know that if they don’t offer a 401(k) match, their competitors will,” says Edwards. “But of course, not all companies are able to reinstate matches yet.”

Ken Kamen, president of Mercadien Asset Management in Hamilton, N.J., says that since the economy began improving, more companies have realized how much employees value a 401(k) match.

“It means a lot to employees because it shows them that their company is taking an interest in their future. The whole attitude has evolved, and more companies realize it’s easier to keep an employee happy than it is to replace an employee,” he says.

Kamen says employers chose to cut their 401(k) matching programs during the financial turmoil because it’s easier than cutting someone’s salary.

“If you slash someone’s paycheck there is a whole lot of resentment there. It’s what people see every week, and it carries a real sigma. But if you cut something like a 401(k) match, employees aren’t going to feel it in the same visceral way. Basically, it’s easier to take away retirement savings than it is to dock a salary,” says Kamen.

Kamen expects more companies to reinstate their matching programs as the economy improves, which is good news for workers who are increasingly doubting the ability to rely on Social Security in retirement.

Towers Watson’s Edwards says employers may change how they match plans to stretch employees’ savings.

“There are two clear match trends being talked about, and one is stretching the match dollars over a greater percentage. The most common matching structure is 50 cents on the dollar, up to 6%, so that equals a 3% match for employees. But another way to stretch that matching contribution is to give an employee 25 cents on the dollar up to 12%. It still equals the same 3% match, but it requires the employee to stretch their own savings up to 12% in order to capture the full match,” says Edwards.

Basically, if matching structures changed it would be because employers were using matching as a tool to change participant saving behavior. The downside may be the affordability of it, as some employees can’t make ends meet if they are putting away 12% into a retirement account, says Edwards.

Another trend in the 401(k) arena is the evolution of the vesting schedule. Edwards says that in years past, employees had to work at a company for anywhere from three to five years in order to receive 100% ownership of their match. However, when the economy was strong, many employers gave participants 100% ownership of their money immediately upon being hired. Now, more employers may look to go back to a longer vesting schedule.