401(k) Plan Trends

A 401(k) retirement plan is a valuable benefit. Nonetheless, as employers look for ways to reduce expenses in the current economic environment, they are scrutinizing the cost of certain plan features, such as the popular 401(k) matching contribution.

Studying the Trends
A recent survey* asked a group of finance and human resources executives about the importance of various 401(k) plan features. Providing an employer matching contribution for some percentage of employee contributions was far and away the top feature, with 87% of executives saying it was “very important.” Even so, 23% of the companies surveyed had suspended their match or were considering doing so, and an additional 15% said they were decreasing their matching contribution.

Data from another survey** suggest one reason why some plan sponsors might have moved to suspend their 401(k) match: Many may still have a defined benefit plan and need to free up money to meet current pension plan funding obligations, in part due to losses from the economic downturn.

No Quick Fix
Changes to a qualified retirement plan should be made carefully and thoughtfully. When the 401(k) is a safe harbor plan, sponsors are wise to fully consider the repercussions of ending a match midyear. For example, when a safe harbor matching contribution is suspended, the plan will be subject to nondiscrimination testing for the entire year. In addition, adequate notice of the change must be provided to plan participants. And suspending the match could cause testing problems for a plan if lower paid employees decide to stop contributing.

Additional Considerations
There are other possible costs to consider, such as the cost of losing valuable employees and the strain of low morale on the organization’s remaining staff.

* Getting Retirement Savings Back on Track, CFO Research Services in collaboration with Charles Schwab, April 2009

** EBRI Notes, June 2009, Employee Benefit Research Institute