Got a 401(k) match?
Employer contributions took a hit during the recession, but now are making a comeback
During some the darkest days of the financial crisis in 2008 and 2009, announcements of cutbacks in employer contributions to 401(k) retirement plans were just another part of the grim economic landscape. By March 2009, 12 percent of the companies participating in a nationwide survey conducted by Watson Wyatt Worldwide Inc. said they had reduced or suspended matches to their defined contribution plans.
According to a year-end 2010 survey by the Profit Sharing/401k Council of America (PSCA), between 2008 and 2010, one out of five companies surveyed (20.4 percent) had either reduced or suspended their matches, though the majority (70.4 percent) indicated they continued matching employee contributions.
Restoring the match
Nearly two-thirds of those companies that suspended their match indicated they had either restored the match or planned to restore it within six months, according to the PSCA’s year-end survey. However, among companies that reduced their match, about two-thirds said they had no plans to restore it to the previous level.
If recent history is any indication, most matches will eventually be restored, said David Wray, the PSCA’s president.
“The trend data is that companies that suspended their matches have slowly begun to re-employ them,” Wray told the Business Record last week. “We had a similar situation in the 2000-02 period, when a number of companies suspended their matches, and within four or five years they had all re-employed them. The companies that suspended matches will probably eventually all be matching them again.
According to the Center for Retirement Research at Boston College, Americans collectively face a $6.6 trillion retirement savings gap – the gap between the pensions and retirement savings that American households have today and what they should have today to maintain their standard of living. Wray said the importance of the employer match to retirement savings can’t be overemphasized.
“What we have seen is that companies that have suspended matches and kept them suspended are witnessing a decline in contributions,” he said. “Our data shows that matching contributions are vital to encouraging employee saving.”
“We did see a little bit of an uptick in 2008 and 2009 in the number of companies that made a change in their match, either suspending it or reducing it,” said Luke Vandermillen, vice president of retirement and investor services with Principal. “That was undoubtedly a reaction to the financial realities of the time. Nobody wants to cut it back, but the reality was that some companies weren’t left with much choice.”
Principal currently administers 29,712 defined contribution retirement plans, the bulk of which are 401(k) or 403(b) plans. Of the 401(k) plans it administers, about 20 percent have a “stated” match, and of those, approximately 20 percent reduced or suspended those matches,Vandermillen noted.
Companies may also make a voluntary match, but unlike stated matches, they aren’t obligated to disclose whether they’ve made the voluntary match. Principal doesn’t have a record of how many of those discretionary matches were made, Vandermillen said.
Vandermillen said he believes matches are slowly returning to pre-recession levels. Additionally, there is evidence of a rebound in matching contributions, he said.
“If you look at the companies that actually made a change, about 30 percent reinstated that matching contribution,” he said. “It’s kind of at a measured pace, but I think the reason for that is pretty clear; there is still a lot of economic uncertainty out there. I think employers are wary of jumping back in.”
Des Moines-based Alliance Technologies Inc. considered reducing its match as a cost-cutting move during the recession, but left it intact. The information technology services firm, which has been ranked in the Inc. 5000 list of fastest-growing U.S. companies for the past three years, provides a 50 percent match up to 6 percent of employees’ contributions; about 90 percent of employees participate.
“We looked at it, and we decided it was an important benefit and (reducing it) would send a bad message to our employees,” said John Voegelaar, Alliance Technologies’ chief financial officer.
Another midsized Des Moines-based company, Kemin Industries Inc., is similarly protective of its 401(k) match, which is currently 50 percent of the first 8 percent of employees’ contributions.
“We’ve never reduced or eliminated the match since we started it, which was 20 years ago,” said Tammi Guldenpfennig, senior vice president and chief financial officer at Kemin, which develops and manufactures nutrition supplement products. “We believe that our employees work hard for the overall success of the company, and it’s one way that we can thank our employees for their commitment. And it’s a way we can encourage them to save for their retirement.”
According to a statewide survey of Iowa companies by David P. Lind & Associates LLC, the average match among employers that provide a match was 53 percent of the first 8.5 percent of employee contributions this year, down from an average of 61 percent of the first 8.3 percent of employee contributions in 2010.
“Overall, I don’t see a great number of employers dropping retirement benefits,” said David Lind, president of the Clive-based benefits research firm. A total of 958 companies with two or more employees responded to the 2011 survey, which was sent to nearly 3,500 randomly selected employers earlier this year.
“During the recessionary period, they might have been more apprehensive about providing matches, and I think there is still a lot of apprehension about how the economy is looking for the next year or so,” he said. “I think employers aren’t likely to go too far beyond what they’ve done in the past.”
The percentage of Iowa employers that offer 401(k) plans took a significant dip in the past year, however. This year, 55 percent of companies that responded to the survey reported offering a 401(k), down from 64 percent last year. Since 2007, the percentage of Iowa companies offering a 401(k) had steadily increased before dropping slightly in 2010.
“It was an interesting drop, and I’m not sure I know what to attribute that to, other than that the smaller-sized employers are kind of a wild card,” Lind said.
“I think I would really need to see the results for 2012 to see if this was a trend or an anomaly.”
Lind said smaller companies, those with 50 or fewer workers, led the decline in 401(k) plans offered.
“It’s very difficult for small employers to be able to offer those kind of benefits on an ongoing basis because of the cost,” he said. At the same time, “we really haven’t seen a retraction of benefit offerings for the larger employers; they’ve been fairly consistent.”