The Wall Street Journal
By: Kelly Greene and Eleanor Laise
August 3, 2010
Roughly a year into the current economic expansion, U.S. corporations and their shareholders are enjoying surging profits and rising dividends--yet many employees are still waiting for the restoration of one of their most important benefits, the 401(k) match.
Hundreds of major employers in recent years have reduced or eliminated their contributions to workers' 401(k) plans, which typically match workers' contributions up to a certain percentage of pay and are considered critical building blocks for retirement savings. A number of these employers said they hoped to resume the matching benefit when business improved. But so far, these benefits have been restored only sporadically.
FedEx Corp. last week boosted its profit expectations for the year to $4.60 to $5.20 a share, up from $4.40 to $5 previously, but said it is taking roughly two years to fully restore the employer matching contributions it cut in February 2009. FedEx had to ask everyone to "share the pain and make sacrifices, because the global economy was so slow," spokesman Jess Bunn said.
Rival United Parcel Service Inc. raised its dividend more than 4% earlier this year but still hasn't restored the 401(k) match it suspended in early 2009. Since some workers also own UPS shares, the dividend boost "is certainly helping employees as well as our outside shareowners," said Norman Black, a UPS spokesman.
All told, almost one in five U.S. companies with at least 1,000 workers have reduced or suspended their matching contributions since September 2008. Roughly half have yet to restore those benefits, though many are considering reinstating at least a portion of the match within the next 12 months, according to a survey this spring by employee-benefits consulting firm Towers Watson.
Smaller companies are especially reluctant. A March survey by Fidelity Investments found that only 36% of employers with 500 or fewer workers had reinstated previously suspended matches or planned to do so in the next 12 months.
If anything, more cuts may be on the way. One in 10 employers as of February planned to reduce or eliminate matches within the next 12 months, according to a survey by the Society for Human Resource Management released in late June.
Many employers suspended their matches after the dot-com bust but were quicker to restore them, 401(k) experts say.
"There wasn't this hesitation we're seeing now," said Pamela Hess, director of retirement research at consulting firm Hewitt Associates. Given the growing worries about the sustainability of the economic recovery, employers don't want to reinstate a match only to suspend it again next year.
Honeywell International Inc., whose second-quarter earnings were flat compared with a year earlier, cut its match in half last year and doesn't plan to increase it "until there is greater certainty in the economy," said spokesman Robert Ferris.
An employer match suspension that lasts just one year can put a serious dent in workers' retirement balances. Consider a 30-year-old worker earning $50,000 a year, contributing 6% of pay to a 401(k) and receiving a 3% match. With an annual raise of 3% and an investment return of 7%, a one-year match suspension could mean the worker has $16,000 less at retirement age, according to Hewitt.
In a recent BlackRock Inc. survey, 401(k) plan participants said the employer match was the most important factor influencing their savings--more influential than their household budget.
At companies that suspended matches, about 18% of participants in plans with fairly generous match rates stopped contributing in 2008, according to the Employee Benefit Research Institute. Tough economic times, of course, can prompt workers to stop contributing. But the more generous the employer match, the more likely workers are to halt their own contributions when it is suspended, said Jack VanDerhei, research director at EBRI.
The cuts come at a time when workers are becoming more reliant on 401(k)s to fund their retirement. At many companies, these self-managed accounts have replaced traditional pension plans. Information-technology firm Unisys Corp. froze its pension plan in late 2006 and boosted its 401(k) match around the same time. At the end of 2008, the company announced it was suspending the 401(k) match. The benefit remains suspended, though "we've continued to evaluate the match in light of business and economic conditions," said Jim Kerr, a company spokesman. Last Tuesday, the company reported that second-quarter earnings from continuing operations jumped 52% from a year earlier, to $1.37 a share. Its stock had a one-day gain of 12%.
The 401(k) match also is an important employee-retention tool for companies. Those that suspend it for too long run the risk of losing valuable employees.
Brad Foreman, 33 years old, a chemical-plant operator in Iowa, La., started looking for a new job after his employer, PPG Industries Inc., suspended its match in March of last year.
"It was a big deal, because it was all we were getting from them," said Mr. Foreman, a father of four. PPG reinstated its match on July 1, but it was too late to keep Mr. Foreman, who recently took a similar job at ConocoPhillips. "They match 401(k) contributions better," he said.
--Matt Phillips contributed to this article.