Jan. 6, 2009 — I realize with the slumping economy that organizations may need to take some critical steps to maintain their viability. We've seen indications in various surveys about lowering merit budgets, eliminating bonuses, layoffs, hiring freezes, etc. And I think most employees realize that during tough times, any "advancement" in pay and such are typically put on hold.
But when you see organizations lowering or altogether eliminating the company match to 401(k)s, this seems to hit just a little too close to home (I saw a Watson Wyatt survey indicating 2% had already done so and 4% anticipated doing so in 2009). While especially here in the United States, the average savings rate is almost nonexistent, employees with this kind of news to contend with from their employer are probably already searching the want ads.
Employers must be cautious as to how much cutting to the bottom line they will do and the long-term effects it may have on retention when times start picking up again — which they inevitably will. If the financial status of the organization is in a state that warrants such drastic cuts, then look to other areas of total rewards that can still engage and retain even during these difficult times.
Any other thoughts Lenny?
A recent New York Times article, “In Need of Cash, More Companies Cut 401(k) Match,” reported that several companies, including FedEx, Motorola, Resorts International and a host of others, had made the decision to suspend employer matching contributions. The next day another article, "More Companies Are Cutting Labor Costs, but not the Labor," talked about how many organizations are taking concerted efforts to avoid layoffs by introducing things like alternative work schedules, furloughs, unpaid vacations, shutdowns, extended unpaid holidays … and, yes, salary freezes and 401(k) matching suspensions.
These articles indicate that some companies are truly attempting to do their best to avoid simply reducing headcount to cut labor costs. This seems somewhat different than in previous economic downturns, as more companies today know they have talented, productive workforces that they have strategically invested in. They don’t want to just throw that away in the short-term when expectations are that things will, indeed, turn around at some point. Like you said, Rose, employers must be cautious as to how much cutting they should do (and how they should accomplish this) so as not to jeopardize their long-term success.
It is definitely unfortunate that some companies have felt forced to suspend 401(k) matching contributions to reserve cash. Obviously, savings from this can be immediately realized because such contributions typically are measured as a percentage of payroll. It is understandable, but still unfortunate on more than one front.
With the decline of traditional DB plans, 401(k)s have become the primary vehicle of retirement savings for most working Americans. In the past several months, employees have seen their balances dramatically reduced due to market conditions; at the same time, as you mention, Rose, personal savings rates have been traditionally low. This further chips away from an individual's savings and ability to retire comfortably.
With matching contributions being an incentive for plan participation, we also could see lower enrollment in these plans, as well as people dropping out. What about the fact that any cutbacks (even temporary), missed or lower contributions (both employee and employer) negate future compounding earnings … earnings that can never be made up. There has already been reporting of increased loan and hardship withdrawal activity.
Rose, to your comment about other areas of total rewards still engaging and retaining even during these difficult times, I agree with you, especially for those companies that have always deployed a total rewards strategy. This strategy will continue to serve them well during the tough times. However, the challenge is that current recessionary conditions may last for an extended period of time and with these cuts, you are talking about both a short-term and long-term impact on one's standard of living. Yes, companies may still be able to engage and retain people, but if things don't bounce back soon, over time, continuous cuts have a demoralizing impact on the workplace.
I guess suspension is better than layoffs. And hopefully the suspensions are temporary, but the whole issue brings to light the retirement security (or is it insecurity?) of the American people. With traditional pension guarantees gone, the safety net of Social Security continually in jeopardy and the onus of responsibility on the individual, what are people to do? How will the massive group of baby boomers address this? Those currently in or near retirement? Will people be working longer? How will they recover? Will they recover?
Frank Giancola, SPHR Researcher Writer Member Since: 12/1/2004 Comments: 197
Excellent article on this subject in the Wall Street Journal of 1-08-09Big Slide in 401(k)s Spurs Calls for Change http://online.wsj.com/article/SB123137714796462913.html
Paul Weatherhead Program Manager Member Since: 5/1/2000 Comments: 553
Thank you, Rose & Lenny, for addressing this issue. I can't help but think there was a broken promise somewhere along the way when companies started shifting away from DB pension plans to DC savings with the promise that employees can better invest for their retirement by having control over their company contributions to 401(k)s. That promise now seems shallow in light of (a) the huge drop in the stock market, and (b) companies suspending their contributions to 401(k)s.
Jan. 6, 2009 — I realize with the slumping economy that organizations may need to take some critical steps to maintain their viability. We've seen indications in various surveys about lowering merit budgets, eliminating bonuses, layoffs, hiring freezes, etc. And I think most employees realize that during tough times, any "advancement" in pay and such are typically put on hold.
A recent New York Times article, 
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