Posted on 03/27/2003 11:28:27 AM PST by Willie Green
For education and discussion only. Not for commercial use.
Company contributions to 401(k) plans are shriveling up these days - even when the company happens to be in the 401(k) business.
Charles Schwab, which has a growing line of 401(k) management services, announced recently that it would no longer make contributions to its own employees' 401(k) accounts.
Schwab says suspending its relatively generous contributions will save a significant amount of money, though less than $15 million per quarter.
The San Francisco Chronicle reports that Schwab is just the latest major employer to suspend its match in recent years. The other include Ford, Daimler-Chrysler, a host of auto-parts makers, Goodyear Tire & Rubber, Great Northern Paper, Tech Data, El Paso Corp., CMS Energy and U.S. News magazine.
Still, it's rare to see large companies suspend their match entirely, says David Wray, president of the Profit Sharing/401(k) Council of America. "The human resources implications of that are significant."
Nationwide, company contributions to 401(k) plans peaked at 3.3 percent of payroll in 1999, according to a survey by the council. That fell to 2.5 percent in 2001. There are no numbers for 2002 yet.
Given the difficult economy, Wray says, many companies are cutting back on discretionary contributions or amending their plans to make the match more flexible.
Levi Strauss, for instance, used to match 50 cents per dollar up to 10 percent of pay. Last year it changed to a variable match based on "business performance," says spokeswoman Melinda Gable. "Last year was really high. We hit our internal targets, and matched 75 cents on the dollar."
Most companies try to maintain their match because it is the best way to get employees at all levels to contribute to their 401(k) accounts.
"One of the main motivations of matching programs is to help (companies) meet federal nondiscrimination rules for pensions," says Gary Engelhardt, an associate economics professor at Syracuse University.
These rules are designed to prevent the highly compensated from getting more tax-deferred benefits than lower- paid people. "The match is designed to get non-highly compensated employees to save more. If they save more, the highly compensated employees can shelter more," Engelhardt says.
Although workers who get a match are more likely to participate in a plan, they don't necessarily put in more of their own money.
On average, employees in a plan without a match contributed 7.4 percent of their pay. Employees in a plan with a match contributed only 6.8 percent, but thanks to the match, their total contribution reached 10 percent of pay, according to an October 2001 study by the Employee Benefits Research Institute.
"Most employees contribute just enough to grab the company match and go no further," says Jack VanDerhei, an institute fellow.
When companies slash their 401(k) contribution, it's usually to avoid even worse cuts, such as layoffs or reductions in health benefits, according to the Chronicle.
"Some firms feel that the matching contributions are a second- or third- tier benefit," Engelhardt tells the newspaper. "Health insurance is the one employees value most. If there is a traditional pension plan, that is highly valued. Just having a 401(k) is also valued. The match itself, some firms believe, is not a first-tier benefit."
Some employers use a cut in the 401(k) match "as a way to educate participants that this is not a guarantee," says Rick Meigs, president of 401khelpcenter.com. These employers send the message: "If you want your match back, work harder and improve our profitability."
But the cut comes as a surprise to the vast majority of rank-and-file workers, who think the match is an entitlement, says Meigs.
Links
* San Francisco Chronicle article
Sounds to me like this is the problem. Most companies are very clear in their HR manuals about 401(k) matching contributions and how they can change from one year to the next.
Many people assume that a 401(k) plan only allows the employee to invest in stocks. Most plans offer a range of investing options, including stocks, bonds, money market funds, etc. You can usually "stay in the 401(k)" without exposing yourself to stock market fluctuations simply by directing your 401(k) money into low-risk investments.
Anyone who wants to "cash out" of a 401(k) just because they don't like the returns they are seeing doesn't belong in a 401(k) plan in the first place because they clearly do not understand the nature of long-term investing. There's nothing anyone can do to help people like that except pay them their $12,000 per year in Social Security benefits after they retire.
You sound like a person who would move from Orlando to Detroit on account of one month of cold weather. Fact is, the returns on the average 401(k) have been nothing short of spectacular when viewed over the past 20 years. There are still people in my company today kicking themselves for not getting into it earlier when it was first offered (in 1983).
Even with the downturn of the past couple years, my 401(k) is far better than I would have done with cash or bonds over the past 20 yeras. In fact, with the lower share prices, my monthly contributions buy more shares than they would have in years past. At any rate, as I get older, I gradually move my holdings into fixed or safer funds. So the recent dot-com implosion has not caused me to lose a lot of sleep.
401(k) is probably the best benefit an employee has. It might look good on paper today for companies to stop matching employee contributions but it will come back to bite them later when the economy improves and the employees start looking elsewhere for a place to work.
It's frustrating isn't it? As a manager, I've been trying to convince my employees to participate in the 401(k) plan for years. Some get it, many never do. Many have a defeatist attitude about the whole thing because they just don't understand or they don't want to take the time to understand. My company will not match unless you contribute at least 3% of your income into the plan. Yet I have more than one employee contributing just 1% or 2%. Then they wonder why their balance never seems to grow where just another 1% to 2% on their part will result in the company throwing in another 3%. Go figure.
You can be ready for the golden years by having having if there's number of diverse investment plans available: personal investment, pension, 401k, Roth, IRA and insurance. For most people, the pension, IRA and Roth plans are completely unavailable, that limits your options and increases your risk.
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