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Employers inflict blows to 401(k)s
Company matches withheld
AP Photo
Rosa Santiago sorts packages before loading them onto delivery trucks at the FedEx Express Station in New York. FedEx is among a number of companies that have suspended their employer contributions to workers’ 401(k) retirement plans during the world economic downturn.
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Published: December 21, 2008
NEW YORK - Companies eager to conserve cash are trimming their contributions to their workers' 401(k) retirement plans, putting a new strain on America's tattered safety net at the very moment when many workers are watching their accounts plummet along with the stock market.
When the FedEx Corp. slimmed down its pension plan last year, it softened the blow by offering workers enriched 401(k) contributions to make up for the pension benefits some would lose.
But last week, with Americans sending fewer parcels and FedEx's revenue growth at a standstill, the company said it would suspend all of its contributions for at least a year.
"We will have to work more years and retire with less money," said Lee Higham, 44, a senior aircraft mechanic at FedEx, who has worked there for 20 years. "That's what we are up against now."
FedEx is not the only one. Eastman Kodak, Motorola, General Motors and Resorts International are among the companies that have cut matching contributions to their plans since September, when the credit markets froze and companies began looking urgently for cash. More companies are expected to suspend their matching contributions in 2009, according to Watson Wyatt, a benefits consulting firm.
For workers, the loss of a matching contribution heightens the pain of seeing a retirement account balance shrivel away because of the plunging stock markets.
"We are taking a beating," said another FedEx mechanic, Rafael Garcia. "In a year, I lost $60,000 of my 401(k). You can't make that up."
To many retirement-policy specialists, the lost contributions are one more sign of America's failure as a society to face up to the graying of the population and the profound economic forces it will unleash.
Traditional pensions are disappearing, and Washington has yet to ensure that Social Security will remain solvent as baby boomers retire and more workers are needed to support each retiree.
The company cutbacks may mean that some employees put less money into their retirement accounts. Even if they do not, the cuts, while temporary, will have a permanent effect by costing many workers years of future compounding on the missed contributions. No one knows how long credit will remain scarce for companies, or whether companies will start making their matching contributions again when credit loosens and business improves.
"We have had a 30-year experiment with requiring workers to be more responsible for saving and investing for their retirement," said Teresa Ghilarducci, a professor of economics at the New School in New York. "It has been a grand experiment, and it has failed."
In the typical 401(k) plan, the employer's matching contribution is more than just money for retirement. It also motivates employees to set aside more of their own money for old age. The more workers save in a 401(k) plan, generally, the more "free money" they can get from their employers under the matching provisions.
Retirement-policy specialists said they did not expect employees to react immediately to the loss of this incentive by stopping their own 401(k) contributions. Study after study has shown that employees tend to procrastinate when it comes to retirement-plan chores, and in this case the inertia may work, unwittingly, in their favor.
Americans, however, are facing extreme household financial pressure. Given the extraordinary times, President-elect Obama has said that he would support allowing withdrawals from retirement plans without penalties, which would provide short-term relief but would further undercut American's long-term saving power.
Benefits specialists said that if matching contributions continued to dwindle, fewer newly hired workers could be expected to join 401(k) plans. And employees might eventually slow or stop their contributions if the recession drags on and their own cash runs short.
"The problem is, we are heading into this serious recession, and we don't know how long it will go on for," said Alicia Munnell, the director of the Center for Retirement Research at Boston College. "The bottom line is, people will have less money in their 401(k) plans, not just because the financial crisis has decimated their assets, but also because they will not have the employer match for some time."
Currently, most companies that offer 401(k) plans do provide some sort of matching contributions, according to David Wray, the president of the Profit Sharing/401(k) Council of America, an association of employers that provide such plans.
The most typical arrangement is for employers to match 50 cents of every dollar their employees set aside in their retirement accounts, up to 6 percent of pay. Sometimes the match is more, sometimes less, and some employers vary it depending on profitability. Overall, the employer's contribution cost usually works out to about 3 percent of payroll.
The latest 401(k) cutbacks underscore workers' vulnerability in an age when companies have been replacing defined-benefit pension plans with the newer 401(k) design. Modern 401(k) plans give workers the power to opt in and out and require them to invest their own money, bearing market risk on their own. That may be appealing when the markets are rising, but it can be terrifying when they fall, as they have recently.
An employer's contributions to a traditional pension plan cannot be switched on and off at will. Federal rules set a firm contribution schedule, with deadlines and penalties for companies that fall behind. Employers also get significant tax and accounting benefits from operating a traditional pension plan, so they tend to think long and hard before freezing such a plan to save money when the economy cools.
In a 401(k) plan, by contrast, the employer has much greater freedom to stop making matching contributions when times are tough, or to follow what the competition is doing. Contributions are normally measured as a percentage of payroll, and the savings from any cuts are realized immediately. That greatly simplifies planning and making changes.
"Every percent you cut is a percent of payroll," Munnell said. "It comes down to the choice of laying people off, or cutting back on some fringe benefits."
Many of the latest 401(k) cutbacks are turning up in industries with obvious financial problems, like the auto industry, health care and newspaper publishing. Industries that depend on free-spending consumers, like resorts and casinos, are also seeing cuts. Often when one company in an industry cuts its benefits others will follow, to keep their labor costs competitive.
General Motors and Ford Motor both suspended matching contributions to salaried employees' 401(k) accounts, although pension plans for unionized workers are unchanged.
Motorola, struggling to stay competitive in the wireless communication business, stopped contributions to its 401(k) plan this month and froze its pension plan as well. Other recent cuts have occurred at Resorts International Holdings, Vail Resorts and Station Casinos.
In addition to stopping their matching contributions, companies have also been freezing salaries this fall, shifting more of the cost of health care to their workers, and laying people off.
"These are really hard times and people are losing their jobs, and in some ways, a suspension of a 401(k) match, while bad, is probably one of the lesser evils out there," Munnell said.
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