Many companies are eliminating 401(k) matches altogether or delaying eligibility for employer contributions.
Two different surveys released recently show something significant happening in 401(k) plans. Companies sponsoring 401(k) plans are looking for flexibility when it comes to financing and making their contributions to these plans. In some cases, this means eliminating the match altogether. However, companies are also implementing or considering plan features that delay eligibility for employer contributions and that make those contributions discretionary rather than automatic.
Let’s look at the elimination of matching contributions first. While not yet a widespread phenomenon, a small but significant number of employers have decided that eliminating matching employee contributions to 401(k) plans will help the bottom line more than it will hurt employee relations. Since the nadir of the recession in 2009, the number of companies that match employee contributions to 401(k) plans has decreased by almost 7%, according to the 401k Performance Survey, conducted by American Investment Planners LLC in Jericho, N.Y.
The most dramatic decline occurred in 2010 when 5% or an estimated 13,811 plans stopped their matches. Another 2% of 401(k) plan sponsors stopped their matches in 2011. Those numbers have not yet recovered even though the economy has been in a slow recovery for some time. At this point, it may be fair to assume that these companies are not going to bring back their matches.
Meanwhile, the 12th Annual 401(k) Benchmarking Survey conducted by Deloitte, the International Foundation of Employee Benefit Plans (IFEBP) and the International Society of Certified Employee Benefit Specialists (ISCEBS) found that the number of employers foregoing a match or profit sharing contributions entirely has declined from 11% in 2010 to 6% in 2012.
However, the Benchmarking Survey uncovered some other interesting trends. More companies are delaying employee eligibility for matching contributions until employees have been with the company or participated in the 401(k) plan for a certain period of time. The percentage of employers offering immediate eligibility declined from two-thirds in 2011 to 56% in 2012, according to the Benchmarking Survey. Among the 44% of plan sponsors delaying matching contribution eligibility, 12% require a waiting period of less than a year, 23% use a one-year waiting period and 9% use some other length of time. In addition, the Benchmarking Survey found that 21% of employers are considering plan design changes to make all employer contributions to the plan discretionary rather than automatic.
Companies that are considering the elimination or reduction of 401(k) matching contributions should factor in the repercussions of that decision. Quite simply, if an employer is offering a retirement plan to help employees prepare for their future, matching contributions play an important role in that endeavor. The Benchmarking Survey found that two-thirds of the companies that reported suspending matching contributions saw employees’ 401(k) contributions decline, “drawing a direct correlation between matching contributions and the levels at which employees participate,” the study notes.
When you consider that only 12% of 401(k) plan sponsors in the Benchmarking Survey say that their plan participants “are or will be financially prepared for retirement,” CFOs should not forget to consider how any changes to 401(k) plans could impact employees’ future economic security.