Defined-contribution-plan participants can be forgiven for
feeling abandoned during the recent economic crisis, when many
corporations suspended 401(k) matching contributions. Employers
that took this step at some point between 2007 and 2009
included American Express Co., Honeywell International,
JPMorgan Chase & Co., Motorola and Starbucks Corp.
Although sponsors dont have to report when they stop
or resume matches, the Washington-based Pension Rights Center
tracked suspensions as recently as 2011. The 401(k) match
is very important in that it provides employees with the
incentive to contribute at least to the match level, says
legal director Rebecca Davis, who works closely with plan
participants on contribution matters.
Combined with low returns from increasingly lower-risk
portfolios, gaps in matching contributions have made it even
harder for workers to meet their retirement goals. Sponsors
need strong defined contribution plans to attract and keep
talented employees, and some of them are trying to recover lost
ground by offering better inducements to save. While the
vast majority of DC plans already offer some form of matching
contribution, not all have structured those policies as
strategically as possible to encourage savings, says Donn
Hess, Kansas City, Missouribased head of product
development for J.P. Morgan Retirement Plan Services.
Prospects look brighter now that matches have resumed. In
its 2012 survey of U.S. defined-contribution-plan sponsors,
consulting firm Towers Watson found that 79 percent of
respondents that reduced or suspended their contributions had
partly or fully reinstated them. The survey also noted that
employer contributions are steadily increasing, a finding
echoed by Schwab Retirement Plan Services, the benefits
recordkeeping arm of financial services firm Charles Schwab
Corp. Schwab recently reported that 73 percent of employers
polled made 401(k) matching contributions last year, up from 68
percent in 2010.
As they revisit their plan designs, more sponsors are making
so-called nonelective matches that funnel contributions to
participants regardless of whether those workers are deferring
salary, says Robyn Credico, Arlington, Virginiabased
defined-contribution-practice leader for Towers Watson. About a
quarter of employers from the firms 2012 survey are
making nonelective matches.
Driving these trends are spare cash after the shutdown of
defined benefit plans and sponsors desire to make their
defined contribution offerings more attractive to new
participants, Credico explains. Defined contribution
enrollments are on the rise too. Last year 56 percent of
companies had a defined contribution participation rate of 80
percent or higher, up from 50 percent in 2010, Towers Watson
Credico and her colleagues have also noted an increase in
defined contribution participants when sponsors bring in
automatic enrollment. Even when the employer match stays the
same, she says, companies are showing a commitment to the plans
by offering them to more people.
The percentage of salary that an employer is willing to
match is climbing again but still catching up to precrisis
levels. Schwab pegs the average at 3.95 percent of salary last
year, compared with 4.19 percent in 2007.
Theres evidence that many employees save up to but not
beyond the match amount, J.P. Morgans Hess says.
Companies need to consider matching 50 percent of employee
contributions up to 6 percent of salary rather than all of the
first 3 percent, he contends. Matching only up to 3
percent can actually discourage participants from raising their
deferral rate, Hess says. The portion contributed
by the company remains the same in dollar terms, but the impact
on participant savings can have a significant benefit, he
adds of his recommendation.
Jack VanDerhei, research director for the
Washington-based Employee Benefit Research Institute, has
seen the same counterintuitive result. VanDerhei compared
401(k) plans whose sponsors made more than $100,000 in matching
contributions in 2007 before turning off the taps the following
year. The more generous the match, the more likely employees
were to stop contributing when it disappeared.
Worried workers should remember that if employers wanted to
end their plans, theyd shut them down, VanDerhei says.
Sponsors have always been intent on bringing the matches
back as soon as it is practical, he adds.