Restored 401(k) matches point to an economic thaw

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The Washington Post

By: Michelle Singletary

February 18, 2010

 

People are always looking for signs that things are going to get better, or at least a reliable indicator that any misery they're experiencing will eventually end.

In winter, we turn to Punxsutawney Phil. It wasn't good news this year. Soon after the groundhog saw his shadow, much of the country was hit with blizzard conditions. Six more weeks of bad weather might indeed be upon us.

 

When it comes to this economy, we are also looking for Phil-like prognostications. The monthly unemployment rate, which dropped in January from 10 to 9.7 percent, can be read depending on your mood: chilly, because it didn't change that much; or warm and fuzzy, a sign that the economy is picking up.

 

In the latter category is a new report that says many companies are planning to restore the 401(k) match they halted or reduced when the economy got bad.

 

Eighty percent of companies that suspended or reduced their company matches in 2009 say they are planning to restore it this year, according to Hewitt Associates, a human resources consulting and outsourcing services company.

 

An analysis by Hewitt last spring found that companies could, on average, save more than $1,500 per employee each year by suspending the 401(k) match, assuming the average employer contributed 50 cents to the dollar on up to 6 percent of pay. So a typical large U.S. company might have saved $25 million a year; the average mid-size company more than $10 million; and the average small company $2 million annually.

 

Even AARP, which used to be called the American Association of Retired Persons and is a huge advocate of retirement savings, announced last March that it was suspending contributions to its employees' 401(k) plans. Although it achieved a savings of about $7.2 million, the organization reinstated its match last month.

 

Cutting the 401(k) match might have caused a positive cash flow for employers and even saved some jobs, but research has shown that suspending it can have a negative effect on employee participation.

 

Without the match, some employees reduce or even stop what they're contributing. It's a shortsighted move on the part of employees, but when money's tight and you aren't getting the contribution dollars from your employer, it's a move they can easily justify.

 

Part of the reason companies are restoring the match is that they are worried their employees aren't saving enough for retirement, Hewitt found.

 

"While there has been marked growth in 401(k) balances since the market recovery began, we still see too many workers not saving and investing in a way that will help them achieve their retirement goals," said Pamela Hess, Hewitt's director of retirement research. "Employers are trying to do their part to help, which is why they are restoring their matching contributions and offering features and tools that push workers to save more throughout their working years." At the end of last year, Hewitt looked at 162 mid- to large-size U.S. companies representing 5.7 million employees. Their survey found that only about half of employers are confident about their workers' ability to retire with sufficient assets.

 

So now that the match is coming back on the table, a lot of companies are looking at other ways to boost retirement plan participation.

 

For example, Hewitt found that 46 percent of employers that do not already offer automatic portfolio rebalancing are likely to add this feature to their workers' retirement plans. With this tool, portfolios are regularly rebalanced so that an employee's retirement assets meet their own targeted asset allocation. I'm a big fan of these tools, because they help maintain a diversified mix of assets without the employees having to worry about when or how to change the allocation. Far too many employees just set and forget their workplace retirement plans, which can result in their taking more risks than they might want.

 

Another feature employers are increasingly offering is automatic contribution escalation. With this option, employees can elect to have their contribution rates increased over time. Thirty-eight percent of employees in the Hewitt survey said they are likely to add this feature.

 

The introduction of automatic escalation could significantly increase overall 401(k) funds, especially for low-income workers. The Employee Benefit Research Institute calculated in a 2007 report that having such an option could increase 401(k) holdings from 11 percent to as high as 28 percent for low-wage employees.

 

I'm a pragmatist, and thus not a believer in Punxsutawney Phil's prognostication ability. It's just a cute tradition. But Hewitt's report is a solid sign that things might indeed be turning around for the economy.

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This page contains a single entry by Ernest Roberts   published on February 18, 2010 3:47 PM.

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