Things are looking up for 401(k) matches.
Over the past several years, as companies tightened their belts and slashed their budgets, many plan sponsors reduced or completely eliminated matching contributions to employee retirement accounts. But according to the 2011 Retirement Plan Survey by Grant Thornton, Drinker Biddle, and Plan Sponsor Advisors, 29 percent of companies plan to fully reinstate matching contributions some time in 2011. And though that still leaves 42 percent who will not be changing their match strategy (with 29 percent undecided), it seems that employers may be turning a corner in their financial decision making.
In recovery mode
Jennifer Flodin, chief operating officer and co-founder of Plan Sponsor Advisors, LLC, said that despite the still shaky economic ground companies are on, the motivation to reinstate 401(k) matches is strong.
“There’s a commitment on behalf of the employer to ensure a participant has a successful retirement,” she said. “Also, from a participant behavior perspective, it’s an incentive to participate, to at least provide that minimal contribution.”
But the chief reason, according to Steve Hughes with Pentegra Retirement Services, is typically monetary. Employers are in recovery mode, reinstating the items they had to let go of during the downturn.
“Additionally, it’s a good employee morale booster,” Flodin said. “And potentially, from a competitive perspective, if they’re in a competitive industry and their competitors did not freeze or did not match...some companies consider that alone a reason for reinstating.”
Hughes said that often a company will restore its matching contributions on an incremental basis as a precaution to be sure there is not too much financial strain. If the original matching contribution was 3 percent, for example, the employer might opt for a transitionary period with a 1.5 percent matching contribution in order to test the waters.
Beyond the 401(k)
Sri Reddy, senior vice president for institutional income at Prudential, said that plan participants are looking for more than just a 401(k) now, however.
“401(k) plans are a very effective tool for attracting and retaining talent,” he said, “But employees are looking for products that provide more solutions and more guarantees ... they want to know that when it comes time to retire, they can actually retire.”
Reddy said that, although the 401(k) is still the primary retirement vehicle for most companies, many savvy employers are choosing additional, cost-effective options (such as auto-enrollment and auto-contribution escalation) that assist employees in their retirement savings.
For companies that are not ready to commit to a matching contribution, but would like to have some 401(k) contribution option, Hughes said profit sharing contributions can be a viable option.
“It’s nowhere near as popular as the match, but it’s very common,” Hughes said. “The profit sharing contribution is discretionary and you don’t have to make it, so you can make a year-by-year decision. You make the contribution after the plan year has ended, so you have a lot of flexibility to determine whether you can afford to make the contribution.”
The downside is that employees may not be willing to stick around for a contribution they may or may not receive, he said.
One of the biggest concerns for companies who reduced or eliminated their matching contributions was that many of their employees stopped making personal contributions to the 401(k), too. Without the added incentive of the employer match, many employees didn’t see the point.
But Reddy said that’s a mistake. He said it’s all about educating the participant, and making them aware of the impact of compounding and starting your savings plan early.
“Not only do you want to educate them, but Social Security taxes were cut by 2 percent this year. At Prudential, we are making a concentrated effort to make sure customers are aware of this by taking the 2 percent savings and putting them right back into their 401(k),” he said.
The Retirement Plan Survey showed that, despite the loss of matching contributions and other cutbacks, employees still felt good about their retirement readiness. But Flodin thinks that’s not really the case.
“I think that most of America is concerned about their retirement readiness, we just don’t think they're voicing those concerns to their employer,” she said.
Another issue at play is that people sometimes turn to their retirement account in an emergency.
“It’s not a rainy day fund,” Reddy said. “Unless you have no alternative sources, you shouldn’t be turning to your 401(k) as your funding source.”
Ready to restore?
For the many companies that haven’t restored matching contributions, the financial viability just may not be there. Flodin said for most employers, it’s a matter of going down a checklist of things that were eliminated during the downturn — and they haven’t yet arrived at matching contributions.
Reddy said the key is not to wait until it becomes a competitive disadvantage. If you’re losing talent, you’re doing something wrong.
But he also said that employers are made up of people, too — people who also want to save for their retirement.
“When it comes to that decision, I think it’s an easy one to make,” he said.