Retirement savers already reeling from catastrophic stock market losses can add a new worry to their sleepless nights: losing their employer's 401(k) match. General Motors employees saving for retirement will no longer receive a match for retirement dollars tucked into their 401(k)'s. And many retirement experts say that other companies are likely to suspend 401(k) matches as the financial crisis exerts pressure on their bottom lines.
Here's a look at why companies are withdrawing this retirement perk and what you can do about it.
It's happened before. An employer match to 401(k) contributions is neither required nor permanent. Companies are free to change or eliminate the match at any time. Matches were suspended by many companies during the last recession. Traditionally companies have axed their 401(k) matches during times of financial strife and brought them back when the bottom line improved. General Motors eliminated its 401(k) match in 2001 but then reinstated it when the recession ended. Charles Schwab, CMS Energy, El Paso Corp., Ford Motor Co., Great Northern Paper, Lear, Prudential Securities, Tech Data Corp., and Textron Inc. are just a few of the companies that suspended their 401(k) matches during the 2001 to 2003 bear market, but many of the companies restored the benefits later. Goodyear, on the other hand, eliminated its match in 2003 because of "company restructuring" but plans to restore the match in January 2009 regardless of current market conditions. So far, 401(k) match eliminations are not extremely widespread. Only 2 percent of companies have reduced their employer 401(k) or 403(b) matches this year, according to a Watson Wyatt survey of 248 companies in October, and an additional 4 percent report planning to do so in the next year.
Expect fresh cuts. Company contributions to 401(k)'s averaged 3.2 percent of payroll in 2007, which is a quick and easy area to slash costs when balance sheets are in distress. "If you are in industries that are under pressure, it is reasonable to think that your employer may have to cut back on the match in order to keep going in business," says Alicia Munnell, director of the Center for Retirement Research at Boston College. "Companies take it away after they have weighed the alternatives of cutting healthcare benefits and laying off people." But eliminating 401(k) matches may not even produce enough cost savings to make companies look good to their shareholders. A quarter of companies expect to lay off workers and increase employee contributions to health premiums in the next year, Watson Wyatt found.
Don't adjust your cruise control. The most common 401(k) match is 50 cents per $1 contributed up to the first 6 percent of pay. Losing an employer match causes some workers to drop out of the plan, but most companies don't see huge numbers of employees stop contributing when they withdraw this incentive for retirement saving. When a company moves from automatic enrollment in a typically matched 401(k) to no match, participation drops by 5 to 11 percentage points at six months after plan eligibility, according to estimates by John Beshears, David Laibson, and Brigitte Madrian of Harvard University and James Choi of Yale University in 2007. "The last time companies did this, most people still stayed in the plan and that's because people are passive in nature," says Robyn Credico, Watson Wyatt's director of defined contribution consulting. "So, once you start saving, most people don't stop."
Buy low. But even if you leave your contributions on autopilot, your nest egg will permanently be smaller than it could have been with the match unless you make up the difference yourself. Ideally, retirement savers would increase contributions to offset eliminated employee contributions, but realistically few employees will do that. "Employees really don't change their behavior much," says Munnell. "Inertia reigns supreme. Wherever they are they tend to stick." Many financial advisers and even stock market guru Warren Buffett see a down market as a significant buying opportunity and urge investors to accrue equities that are likely to rise in the future. But the typical retirement saver is currently wary of the market. Employees who are making changes to their 401(k) allocations right now are heading for safer and less lucrative investments that will preserve but not significantly grow their nest eggs. Some 53 percent of employers in the Watson Wyatt survey reported that at least some employees are moving investments in their 401(k) plans out of equities.