Pensions are dying, stock options are dead; bonuses and health-care plans are looking more anemic by the day. Of the portfolio of employee benefits, only the 401(k) remains robust.
Companies have long recognized that when it comes to getting employees to participate in a plan, what counts most about the 401(k) is the size of the employer match. But with the future of Social Security suddenly uncertain, the employer match also acquires a moral dimension. For many people, the matching contributions will make the difference between an uncertain and a sound retirement. In a study released last summer, Hewitt Associates found that for the typical employee, more than half of retirement income is projected to come from 401(k) savings.
Employers are not insensitive to this point. In fact, a CFO survey of finance executives found that the top concern about 401(k) plans is that employees may not be able to retire comfortably.
The historic benchmark for employer contributions is 3 percent of employees' pay, according to David Wray, president of the Profit Sharing/401(k) Council of America in Chicago. However, some companies, pressed by hard times, backed off their commitments to contribute to their employees' 401(k) plans. During the past few years, corporate giants such as Ford Motor, DaimlerChrysler, Delphi, and Charles Schwab (which administers 401(k) plans for other firms) announced that they were slashing or entirely ditching their matching programs, creating uncertainty about the corporate commitment to providing for employee retirement.
San Franciscobased Charles Schwab & Co., which made its matching contributions to 401(k)s on an annual basis, suspended its match for 2003. At the time the program was suspended, "we were trying to institute as many expense reduction measures as possible that would allow us to avoid layoffs," says spokesman Glen Mathison. (Ultimately, the company downsized anyway.) Schwab promised to restore the matching and did so in 2004 at presuspension levels: $2 contributions for each dollar of employee contribution up to $250; after that, dollar for dollar up to 5 percent of eligible pay.
In 2002, Ford suspended its contribution of 60 cents for each worker dollar contributed to its 401(k) plan, up to 10 percent of pay. It, too, reinstated its matching program last year, but at a reduced level of 60 cents on the dollar up to 5 percent of pay. For Ford, suspending its match was nothing new. "We've suspended the match three times in the history of the plan," says Lee Mezza, the company's director of employee benefits. "It's only in circumstances where we've been under significant cost pressures that we've made the decision to suspend the company match. And that's not a decision that's made very lightly."
Certainly not. As any good investor will warn, it's important to make contributions in good times and bad—especially in bad times, when equities can be had at a discount. Moreover, inconsistency in a matching program can reduce participation. "When we saw plan sponsors eliminate or reduce their match because they were under financial distress, we found that once they were able to reinstate the match, it was very difficult to get people to participate again," observes Lori Lucas, director of participant research at Hewitt in Chicago.
Tools of Attraction
Most plan sponsors try to offer a matching program that is in sync with their competitors. "Plan sponsors are always looking at what the competition is doing in terms of matching," says Lucas.
Some actively try to beat their competitors. Hoffman Estates, Illinois-based Sears, Roebuck and Co. fattened offerings in its 401(k) plan for new employees and rank-and-file workers under 40 years of age. Sears's new matching program, which took effect in January, provides $1.50 for each dollar contributed by employees up to 1 percent of pay and dollar for dollar after that up to 4 percent of pay. "Our compensation and benefit system was not competitive with our best-in-class competition," explains Sears spokesman Chris Brathwaite. "Now our company match will be ahead of all major retailers."
Other companies have increased their 401(k) match to make up for cuts in traditional defined-benefit pension plans. In 2004, for example, NCR increased its match to 5 percent (dollar for dollar on the first 4 percent of pay; above that, 50 cents per dollar up to 6 percent of pay). Previously, the match had been 3.75 percent (75 cents per dollar on the first 3 percent of pay; above that, 50 cents per dollar up to 6 percent of pay). The $5.6 billion maker of ATMs and point-of-sale terminals made the change to lower its overall cost structure. Employees over 40 were offered a choice of continuing their participation in the company's defined-benefit plan and participating in a 401(k) plan with the old match or freezing their traditional pension benefit and participating in the 401(k) plan with the new enhanced benefits. Employees under 40 had their defined benefits frozen and became eligible for the enhanced 401(k) program, and new hires will enroll in the enhanced 401(k) plan.
"This was a way of providing competitive and affordable benefits while at the same time containing costs," explains John Hourigan, a spokesman at Dayton, Ohio-based NCR. The new measures, he says, are expected to reduce the company's U.S. pension expenses to zero by 2007.
Ultimately the minimum match should be what is required to entice employees to enroll in their 401(k) plans. "Participation rates are about 10 percent higher for companies that offer a match," says Robert Liberto, vice president of Segal Advisors, an investment consulting firm in New York.
Although there's good evidence that a match increases participation in a plan, the role of the size of the match is less evident, according to Michael Weddell, a retirement consultant in the Southfield, Michigan, offices of Watson Wyatt Worldwide. "The research is not quite clear that having a more-generous match is better than having a less-generous match," he says. "You get the bulk of participation by having any match at all. If you increase the match, it doesn't seem to necessarily lead to higher participation rates."
Whatever method a company uses to determine its match, people need to be educated about the match formula when they're enrolled in a 401(k) plan, advises Weddell. "Employees should have a clear line of sight so they know what the incentive is for investing in the plan," he says.
Unfortunately for many workers, no amount of education will be able to clear the gathering clouds in their sight lines. "It's beginning to dawn on an awful lot of people that they don't have enough retirement income," says William Slater, vice president for retirement services at MetLife. "The savings rate, which has historically never been where it should be in this country, is going to directly impact those people when they hit retirement."
"Employees are absolutely not contributing enough to their 401(k) plans," adds Patricia Pou, a principal at Mercer HR Consulting. "Even employees who can afford it don't realize that they should be saving throughout their career, not at the end when retirement is in sight."
John P. Mello Jr. is a freelance writer based in Woonsocket, Rhode Island.
|Mix and Match|
How companies contribute to 401(k) plans.
|Fixed match (e.g., 50 cents per $1 up to 6% of pay)||72%||72%||73%|
|Graded match (e.g., $1 per $1 on first 3%, 50 cents per $1 on next 3%)||13%||17%||15%|
|Discretionary profit-sharing nonmatching contribution||15%||16%||18%|
|Discretionary profit-sharing matching contribution||5%||10%||7%|
|Match based on length of employee's service||5%||5%||5%|
|Match based on company performance||10%||5%||5%|
|Other contributions (e.g., age-based match)||6%||6%||4%|
|No employer contribution||3%||2%||4%|
|Source: Hewitt Associates 2003 survey of 489 large employers|