Thursday, November 13, 2008
As if retirement planning (in general) and faith in equity markets (in particular) didn't have enough working against them right now, it seems a small, but growing, number of businesses are foregoing their 401k matching contributions in order to conserve cash (and jobs).
Having left the confines of traditional employment almost two years ago, those year-end five percent matching contributions are sorely missed.
What is not missed, however, are the restrictions that most 401k plans impose along with the constant prodding to fill up those Morningstar style boxes with more U.S. equity funds.
How's that workin' for ya, as Dr. Phil would say.
It seems that the 401k industry is in a rough patch at the moment with world-leader Fidelity Investments announcing huge layoffs and a growing number of plan participants opting to scale back or stop contributing to their retirement account.
Those stable value funds may be their only saving grace in the period ahead.
News comes in this BusinessWeek story about the growing number of companies that are eliminating their matching contributions.
When times are tough, companies find cost savings wherever they can. Now some employers are doing away with the 401(k) match, a benefit once considered almost sacred.While private pension plans are inherently unsustainable in the new global economy and their demise was all but assured, it is public pensions that are worth watching going forward.
The list of companies that have suspended or cut back corporate matching in their defined-contribution retirement plans this year is not trivial. It includes General Motors, Frontier Airlines, car-rental company Dollar Thrifty Automotive, broadcaster Entercom Communications, newspaper chain Lee Enterprises, and real estate brokerage Cushman & Wakefield. A recent study by benefits consultant Watson Wyatt of 248 U.S. companies found that 2% had already reduced or eliminated the match and another 4% expected to do so within the next 12 months. The national number could creep higher, however, if the economy continues to worsen. "It depends how long this goes on," says Pamela Hess, director of retirement research at benefits consultant Hewitt Associates. "In another year, you could have another 3% to 5% [cutting back on matches], or you could have 10%."
The trend away from pensions—many of which are now underfunded—leaves retiring employees increasingly reliant on their 401(k)s. In the Watson Wyatt study, for example, 11% of companies said they had frozen or closed their pension plans this year, and another 4% said they expected to do so in the next 12 months. That throws even greater weight on matching plans as part of the nest egg.
What does this trend signify for employee savings behavior? Academic studies show that the existence of a 401(k) match increases contribution rates among employees, but the research doesn't address what happens when a match is cut. Brigitte Madrian, a professor of public policy and corporate management at Harvard University, has studied 401(k) design and behavior. She thinks the end result will be a "small fall" in 401(k) participation as fewer new employees sign up and existing employees stick with the status quo, neither pulling money out of the plan nor adding to contributions. Says Madrian: "You will find the biggest effect on new employees walking in the door. Employees who were already signed on for the plan aren't going to drop out because there's not a match."
How are states and governments possibly going to fund all their retirement obligations?
[Note: For those of you looking to start up a new blog about your retirement hopes and fears, feel free to use the title at the top of this postas its name - according to Google, this is the only current reference.]