401(k) matches slowly reinstated by companies

Companies are slowly starting to reinstate their 401(k) matches, balancing the prospect of economic recovery with their ability to pay for an important employee benefit.

Corporate executives hope to restore the suspended or reduced matches as quickly as possible to raise morale, encourage greater retirement savings and offer a competitive advantage against their peers.

Reinstating the match was “both a financial and morale decision,” said Richard M. Popp, director of employee benefits at Ford Motor Co., Dearborn, Mich.

Bringing back the match also contained “a moral element because we want to encourage savings by our employees,” said Mr. Popp, whose company reinstated the match for its $6 billion salaried employees' 401(k) plan in January after a 12-month suspension.

“It's a pretty tough decision to get rid of the corporate match,” said Lori Lucas, executive vice president and defined contribution practice leader at Callan Associates Inc., San Francisco. “The match is an important anchor.” Bringing back the match takes on greater importance as companies “start transitioning from layoff mode to retaining talent,” she added.

Dean Kohmann, vice president of 401(k) services at Charles Schwab Corp., San Francisco, was more emphatic: “It is the most important feature in a 401(k) plan.”

As the economy improves, some plan sponsors have reinstated matches at previous levels, some have made downward adjustments and some are evaluating reinstatement — but haven't acted.

“Certainly, if the economy weakens, the resolution of plan sponsors to reinstate the employer matching contribution might also waver,” Ms. Lucas said. “However, my experience is that plan sponsors who begin to get the wheels in motion to reinstate the match are highly committed.”

The Pension Rights Center, Washington, keeps a running count of employers that reduce, suspend and/or reinstate corporate matches. Since October 2008, the center counted 320 match suspensions and reductions, of which 36 have been reinstated. (The center acknowledges its list may not be comprehensive because it relies on news releases, news accounts or other sources.)

According to the PRC, companies that have reinstated their matches recently include Regions Financial Corp., FedEx Corp., 7-Eleven Inc. and Eastman Kodak Co., as well Black & Decker Corp. and Stanley Works Co. which recently combined to form Stanley Black & Decker Inc. AARP also reinstated its match.

Company executives like the 401(k) match because they believe it affects employee savings behavior. Results of several studies show “the presence of a match increases participation by five to 10 percentage points,” according to a February report by Boston College's Center for Retirement Research. “Several studies have also documented a positive relationship between the level of the employer match and the 401(k) participation.”

But the impact of suspending a match is more difficult to pin down. For example, Schwab's Mr. Kohmann said an anecdotal review of clients indicated that a 10-percentage-point drop in participation rates was common after the match had been suspended for a year. However, the Center for Retirement Research report said “inertia suggests” most enrollees won't leave, and inertia “is also likely to result in unchanged employee contributions.”

The center's report noted that most large companies reinstated their matches after the 2001 recession. If the current match suspensions are considered temporary as in 2001, “the effects will probably be modest,” the report said.

Of course, participation is affected by more than matches. Usually, when a company suspends or reduces its corporate match, it has taken, or is taking concurrently, other cost-cutting actions ranging from salary freezes to buyouts to terminations.

For example, in addition to suspending its 401(k) match, Ford suspended annual merit-pay raises, bonuses for two years and tuition assistance (which was reinstated this month). It also reduced life insurance for retirees, and it laid off workers.

Ford brought back the employer match — 60 cents for each $1 of employee contribution up to 5% of base pay — to the level that existed before the suspension. “To add anything back before we were completely out of the woods was a hard decision,” said Mr. Popp, “We still have one heck of a challenge” as a corporation.

Rival automaker General Motors Co., Detroit, suspended the employer match for salaried workers in November 2008. It also suspended bonuses, reduced salaries, offered early retirements, agreed to buyouts and laid off workers, said Tom Wilkinson, director of news relations. The company declared bankruptcy in June 2009 but emerged a month later.

The company reinstated the employer match in the salaried employees' plan on Oct. 1 at the same level as before: 100% of the employee contribution up to 4% of base salary.

“We had told employees these were temporary measures,” Mr. Wilkinson said. “We wanted to get the company back to normal. We wanted to retain employees and improve morale.”

He declined to discuss employee participation rates or the amount of DC assets. According to Pensions & Investments' most recent directory of the 1,000 largest retirement funds, GM had $13.3 billion in DC assets as of Sept. 30, 2009.

At Sonoco Products Co., Hartsville, S.C., the unsettled economic outlook caused the company to reduce its match.

The original match, suspended in June, was 100% up to 3% of salary. When it was reinstated in January, the match dropped to 50 cents on the dollar up to 4% of pay.

“We chose not to reinstate the 401(k) program at the full match because of the ongoing uncertainty of the economy,” spokesman Robin Montgomery said in an e-mail message response to questions.

“While there have been indications that the economy is rebounding, we want to be cautious in our approach so that we can continue evaluating the economy and our business in the months ahead.” Sonoco has about $500 million in DC assets, Mr. Montgomery said.

The weak economy and a liquidity issue prompted Worthington Industries Inc., Columbus, Ohio, to suspend its match last June 1, said Eric Smolenski, vice president of human resources. “We were in a deteriorating market,” said Mr. Smolenski. Worthington's DC plan has approximately $280 million in assets.

Suspending the match was part of a cost-cutting effort that enabled Worthington to meet the terms of a debt covenant, he said. June 1 was the first day of Worthington's first quarter of its current fiscal year, and this quarter's performance “was critical” in making sure the company didn't have to restructure its debt, Mr. Smolenski said.

“We did better than we had expected,” he said.

The match was reinstated Sept. 1 at the same level: 50% of the employee contribution up to 4% of compensation.

“We are comfortable we can afford it,” Mr. Smolenski said.

In addition, Worthington continues to contribute 3% of an employee's pay to the 401(k) plan even if the employee doesn't contribute. This payment wasn't affected by the match suspension. “We want to make sure employees are as prepared as possible” for retirement, he said.

Match suspensions can offer companies a chance to revise the structure or strategy of their DC plans, according to consultants.

RF Micro Devices Inc., Greensboro, N.C., used the suspension to change its 401(k) match formula as well as the plan's design, said Ralph Knupp, vice president of human resources at RF, a designer and manufacturer of components for semiconductors.

The company, which has about $100 million in DC assets, suspended its match in December 2008 as “our industry went into a deep slump,” Mr. Knupp said.

RF Micro Devices also froze salaries and put in a hiring freeze.

By the time company executives decided to restore the match in January 2010, “we felt comfortable this was a step that we can continue to afford.” The old match was $1 for each $1 employee contribution up to 3% of base salary. The new match is 100% up to 1% of base pay, plus 50 cents for each employee dollar for the next 5% of base salary.