However, research has shown that suspending the company match negatively impacts employee participation and contribution rates. Once the match is suspended, employees may reduce their own 401(k) contributions or even stop contributing to their plan entirely. As a result, employees’ retirement savings shrink by thousands of dollars due to that one-year suspension. For example, a younger worker earning $50,000 a year who contributes 6 percent of his/her salary will have $16,000 less for retirement than what they would have had if their employer hadn’t suspended their match for one year. That number jumps to $48,000 if the employee stops contributing during that year as well.
Many workers who stop contributing to their 401(k) when their company suspends their match don’t immediately resume contributing once their employer reinstates it. While they may eventually start saving in their 401(k) again, Hewitt finds even a hiatus in savings of just a few years can still deplete retirement savings by hundreds of thousands of dollars. For example, a younger worker earning $50,000 a year who stops contributing 6 percent of his/her salary for five years can have up to $150,000 less for retirement.
"Companies are making difficult decisions to keep their bottom line in the black, and the employer 401(k) match is one of the costliest retirement expenditures they sustain in a given year. Cutting this benefit to reduce costs is a much less drastic action than eliminating jobs or reducing salaries," said Pam Hess, Hewitt’s director of Retirement Research. "However, suspending the match has a significant impact on employees. Not only does it dissuade many workers from saving in their 401(k), but it also adversely affects their ability to save enough to retire. We believe employers should suspend their match only as a last resort. There are less drastic steps they can take to lower costs while still preserving the incentive for workers to save for retirement."
Alternative Actions for Employers
Instead of cutting 401(k) matches, the following alternatives can help employers mitigate immediate cost pressures while still encouraging workers to invest wisely for retirement:
- Decrease the match: The average large employer can save nearly $13 million each year by decreasing their match by half instead of suspending it entirely. This still motivates employees to continue contributing to their 401(k), even if at a lower rate.
- Communicate to employees only through online means: Hewitt research shows that employers believe communication is a critical tool in helping their employees save properly for retirement, particularly during these troubled economic times. Three-quarters (75 percent) of companies are using their intranet site, 60 percent are making use of e-mail blasts, and 49 percent are using Webinars. Still, many employers use printed materials in addition to online tools to communicate with employees. By moving to online-only communication, employers can effectively reach their employees while saving money on paper costs.
- Make fees transparent: Employers should take a closer look at the funds they offer in their 401(k) to ensure they do not carry high expense ratios. Hewitt research shows that additional annual expenses of 0.25 percent - the difference between the typical institutional fund and retail mutual fund portfolio - can reduce projected retirement income substantially over time. For younger employees, these higher costs can erode 401(k)-related retirement income levels by nearly 6 percent by the time these employees reach retirement age.
Savings Tips for Employees
If an employee’s company does suspend the 401(k) match, it is still possible to continue building a significant nest egg by making a few easy changes to his/her saving and investing behaviors:
- Save more: According to Hewitt’s research, the average employee can bridge the savings gap a company 401(k) match suspension creates by upping their contribution by just 3 percentage points a year. Employees who cannot afford to save an extra 3 percentage points explore whether their employer offers automatic contribution escalation, which allows workers to increase their 401(k) contributions in smaller increments of 1 to 2 percentage points per year. Steadily increasing saving rates in this manner can have a noteworthy impact on employees’ ability to accumulate sufficient retirement assets.
- Diversify assets: Employees should make sure they properly diversify their portfolio by regularly rebalancing their asset allocation. Workers who are not financially literate can accomplish this goal by investing in target-date funds or managed accounts. For do-it-yourselfers, automatic rebalancing is a great tool to get the portfolio re-aligned regularly. These tools help workers maintain a proper asset mix, which can help offset the roller-coaster fluctuations of the market maximize their retirement savings. Hewitt research shows 77 percent of employers now offer target-date funds. About half (49 percent) offer automatic rebalancing and another 20 percent are likely to add the feature in 2009.
- Take advantage of advice: Many companies offer services and tools that can help workers make informed investment choices based on their particular needs. According to Hewitt research, 38 percent of companies offered online, third-party investment advisory services in 2008 and another 43 percent planned to add these services in 2009. In addition, one-fifth (20 percent) of companies currently offer managed accounts, which allow employees to delegate the overall management of their accounts to an outside professional.
- Don’t cash out: According to Hewitt research, 45 percent of employees cash out their 401(k) plans when they leave a job. Although it seems tempting - and perhaps intuitive - to cash out 401(k) savings, employees will forfeit 20 percent or more of their account’s value in federal taxes and another 10 percent in early withdrawal penalties. By keeping money in their companies’ 401(k) plans - even when switching jobs or exiting the workforce - workers can continue to grow their savings in a tax-free environment and, in many cases, avoid higher investment fees typically associated with retirement savings accounts offered in the retail market.
