Recession may jeopardize 401(k) contributions

DES MOINES, Iowa — Retirement accounts already battered by a steep market decline may get hit again as several companies suspend or reduce their 401(k) match to save cash.

Workers at General Motors Corp. and Frontier Airlines Holdings Inc., for example, could potentially lose thousands of dollars in company contributions from their retirement accounts.

GM, which recently announced it was suspending company matches for its 32,000 eligible salaried workers, said Nov. 3 its U.S. auto sales plunged 45 percent as it struggles along with competitors to survive the credit crisis and financial market turmoil.

"People know these actions are necessary to conserve cash and maintain viability," said Dan Flores, a company spokesman.

Matching contributions average about 11 percent of a company's profits, according to a recent survey of more than 1,000 companies by the Profit Sharing/401k Council of America.

Now, with the economy driving profits down, some companies are forced to cut costs and look to their 401(k) contribution as a way to eliminate millions of dollars in spending.

Frontier Airlines suspended its 401(k) match on June 1 as part of a wider effort to cut costs as it works its way through Chapter 11 bankruptcy protection. The airline's plan matched 50 percent of employee contributions, up to 10 percent of salaries. The company reported that the match cost it $4.2 million in 2006.

"This is a recession-type of response. These employers are really up against it and they have to decide to cut somewhere and this seems like the least bad place for them to cut," said Alicia H. Munnell, director of the Center for Retirement Research at Boston College.

Last year more than 58 million U.S. workers set aside a portion of their paycheck in a 401(k) retirement plan, and some industry surveys indicate as much as 90 percent of employer-sponsored plans provide a company match.

There are substantial savings to be had for companies large and small, but comprehensive benefits are vital to attracting top talent and staying competitive.

Jamie Bloomquist, 40, works for Maine Boats, Homes & Harbors, Inc., of Camden, Maine. Even with just eight full-time employees, he enjoys a 3 percent match on his account.

"It seems to me that would not be the best place to start cutting because it does say something about their commitment to their work force and their commitment to you as an employee," he said.

For workers who lose the company match, it's essentially a pay cut, said Tom Stritikus, 38, of Seattle, who gets a match of 7.5 percent from his employer.

"People get enraged with they don't get cost of living adjustment for one or two years," said Stritikus, an associate dean at the University of Washington. "But to think about taking an actual cut to your salary is quite a daunting proposition."

Many investors will be watching closely because suspending or reducing 401(k) matches is an echo of the 2001 recession when more than a dozen large companies including Ford Motor Co., Goodyear Tire & Rubber Co. and Charles Schwab & Co. altered their policies.

After seeing profits plummet in 2001 and 2002, Schwab surprised many in the financial services industry when it suspended its match in early 2003 for about 11,600 workers.

"It was something that the company did very reluctantly," said spokesman Mike Cianfrocca. "It was certainly one of the hardest decisions that was made." Management reinstated its 401(k) match in January 2004.

Schwab, which manages company-sponsored retirement plans covering 1.3 million workers, said it hasn't heard of any of its clients planning to suspend or reduce their match in the current climate.

The Vanguard Group Inc. said its research indicates about 5 percent of company plans it manages suspended or reduced matches in the 2001 to 2003 recession.

Spokeswoman Linda Wolohan said it's too early to determine whether that experience will repeat itself in the current downturn because such trends sometimes take months to emerge.

At the moment, there aren't expectations for widespread cuts to corporate contributions. Among large corporations, it's likely to rival the 15 or so companies that were documented in the 2001-2003 downturn.

Principal Financial Group Inc., which manages 33,000 retirement plans covering nearly 3 million workers, said less than 1 percent of its client companies with 401(k) plans changed course in the previous recession.

The Center for Retirement Research at Boston College studied the trend in 2001-2003 and found 15 companies including Prudential Financial Inc., Ford Motor Co., Daimler Chrysler and CMS Energy had suspended their contributions. Most had resumed contributing within two to three years, Munnell said.

One company restoring its benefit is Goodyear, which announced in February 2007 that it would freeze its traditional pension plan on Dec. 31 and replace it with a 401(k) beginning Jan. 1, 2009. Management says the move saves $100 million this year and up to $90 million in 2009 and beyond.

Wayne Ranick, a spokesman for United Steelworkers Union, which represents workers at Goodyear, said the philosophy for many companies is to shift as much of the cost of health care and retirement to workers and away from the company.

"If companies are suspending their 401(k)s, I'm sure its reflective of the economic times," Ranick said. "You're just starting to see the slowdown that's going to take effect."

The ability to discontinue contributions in lean times is one of the features of the 401(k) plan that makes it so attractive to employers, said Jack VanDerhei, research director at the Employee Benefits Research Institute.

"Employers want the flexibility of saying if it's a profitable year and I have more money, I will share it with you," he said. "If it's not a profitable year, I might lower the match or in some cases temporarily suspend it all together."

The last time companies cut back on their match workers did not pull their own money out of their 401(k) plans in large numbers, said Robyn Credico, director of defined contribution plans for business consultant Watson Wyatt.

Research has shown that worker participation in a retirement plan is in large part passive and they tend to leave it alone unless pushed by some financial need to change it.

Cutting their own participation would make matters worse, said Barrie Christman, a vice president in the Principal Financial's 401(k) business.

"All they'd be doing is compounding the problem," she said. "I'd hope people would step up their own contribution, but that could be hard to do in this environment."

For millions of workers, the matching contribution is a critical part of their retirement plan. The most common match is 50 cents for each $1 a worker contributes up to 6 percent of the worker's salary. For example, a worker earning $50,000 a year contributing 6 percent, would put $3,000 into the 401(k) account and the company would put in $1,500.

The real impact on the worker isn't from the loss of $1,500 but rather the lost opportunity to benefit from the compounding of interest on that money over time — which could easily grow to hundreds of thousands for younger workers.

OOPS!... I guess the democrats didn’t think of employers reacting this way when they started floating this idea did they?

Thanks to the democrats, the 401K market will be dead before congress will even have a chance to get their filthy greedy blood-stained hands on it.

Next up — Charitable Contributions will plummet on the assumption that the fuhrer’s new government will take care of Everything AND anticipation of joblessness or severe reduction of ROI added to taxation of earnings.

Not sure about that. We're still a giving people (in large part due to the strong faith of a good number of Americans, which, of course, is why the left never wants to acknowledge private charity). I think faith drives most charitable giving. As a society loses faith, then it turns it over to the state, at least in the West. And I don't see an Obama administration getting rid of the charitable tax deduction as undoubtedly plenty of his supporters take advantage of that.

Here's the problem which people don't understand.

Even a state/federal run system based on transfer payments like Social Security will reduce and cut benefits if an economy falters because unemployment goes up, real wages go down........ those that have to pay the retirements are less and earn less and there is less "wealth to spread around."

It's a myth that your retirements are more secure, or that you're guaranteed more in old age when a government runs the retirement system.

The advantage of a system like the 401K and where retirements are tied up in the markets is that this money is used to grow the economy. The money is “invested” and used in ways that helps long term grow our economy, while a system like social security does little and in fact it's a simple transfer payment, a typical socialist redistribution scheme Obama talks about. Over the course of a lifetime (Say 45 years worked), if one were to invest 12.4% of ones pre tax income into a 401K, you'd be better off than the crumbs Social Security throws your way any day.

Me too. I think the best course with such an unpredictable economic climate and administration is to buy a safe, bite the bullet and close out your 401K and IRA accounts and just sit on the money at least until you see what’s going to happen.

With socialists, who knows? You may have to hide your cash as well as your guns. I hope Karl Marx is rotting in hell.

Don't forget that if you do it, you'll probably lose some, if not all of the company contributions, plus what ever you take out will be added on to your regular income. So if you've got $50,000 in your 401K, you'll wind up paying taxes on your income that year, PLUS the $50,000 (which will also probably bump you to a higher tax bracket.) Then, don't forget that you'll be paying an additional 10% federal tax penalty on the $50,000, and probably some additional state tax penalty as well. That's taking a pretty hugh loss.

Mark

That's taking a pretty hugh loss.

I neglected to say that if the new Marxist administration makes moves to confiscate private retirement accounts (as I've been hearing that they might), then that huge loss would be better than losing it all.

It's a stretch to imagine our government doing such a thing, and I hate to think it might, but with this guy, who knows? We don't know a lot about him, but I'm not all that comfortable with what we do know, especially with a democRat majority in congress.

The more I think about it, the more I think that confiscating 401K funds in the US would be impossible, if for no other reason than it would DESTROY the stock market. I don't mean "crash it." I mean completely destroy it. It would impact the economy in a way that's unimaginable, but think about it. Since the vast majority of 401Ks are made up of mutual funds that invest in stocks, for the government to take control of that much stock at one time would destroy the ability of any public company to get cash, and the value of the companies would tank. It would crash the economy of the US in an instant.

Even offering a voluntary plan would be disasterous, since in order to convert those dollars from mutual funds to government "paper," stocks would need to be sold. That WOULD crash the stock market, as you can bet that there will be FAR more sellers than buyers!

Mark

Disclaimer: Opinions posted on Free Republic are those of the individual posters and do not necessarily represent the opinion of Free Republic or its management. All materials posted herein are protected by copyright law and the exemption for fair use of copyrighted works.