Employers Slow to Reinstate 401K Matching

08/05/2010 Share 0 comments

Eleanor Laise and Kelly Greene of the Wall Street Journal report on the rate that companies are restoring their 401K matching programs.

Hundreds of major employers in recent years have reduced or eliminated their contributions to workers' 401(k) plans, which typically match workers' contributions up to a certain percentage of pay and are considered critical building blocks for retirement savings. A number of these employers said they hoped to resume the matching benefit when business improved. But so far, these benefits have been restored only sporadically.

All told, almost one in five U.S. companies with at least 1,000 workers have reduced or suspended their matching contributions since September 2008. Roughly half have yet to restore those benefits, though many are considering reinstating at least a portion of the match within the next 12 months, according to a survey this spring by employee-benefits consulting firm Towers Watson.

Smaller companies are especially reluctant. A March survey by Fidelity Investments found that only 36% of employers with 500 or fewer workers had reinstated previously suspended matches or planned to do so in the next 12 months. If anything, more cuts may be on the way. One in 10 employers as of February planned to reduce or eliminate matches within the next 12 months, according to a survey by the Society for Human Resource Management released in late June.

An employer match suspension that lasts just one year can put a serious dent in workers' retirement balances. Consider a 30-year-old worker earning $50,000 a year, contributing 6% of pay to a 401(k) and receiving a 3% match. With an annual raise of 3% and an investment return of 7%, a one-year match suspension could mean the worker has $16,000 less at retirement age, according to Hewitt.

In a recent BlackRock Inc. survey, 401(k) plan participants said the employer match was the most important factor influencing their savings—more influential than their household budget.

MyPlanIQ's view is that it may be some time before 401K matching is returned. It puts even more focus on ensuring maximum returns. For example, a well chosen portfolio from a good 401K plan can return around 7% a year with a buy and hold strategy. With a tactical strategy, the returns can be over 10% -- which compensates for the lack of matching. If the company doesn't step up, you must.

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Tags: 401K, retirment