Think you've already got enough trouble saving for retirement? Now, some people are suggesting that companies should consider eliminating one of the most valuable incentives to save in a retirement plan: the employer match.
Frankly, I never thought anyone would find anything bad to say about 401(k) matching contributions. Employees get free money as a bonus for putting their own hard-earned cash into a retirement plan. Businesses reap huge cost savings compared to a traditional pension plan. And matching contributions help companies meet tests that allow their managers and other highly compensated employees take full advantage of tax breaks available to them.
Changes enacted to retirement plans by the Pension Protection Act two years ago now have some wondering whether an employer match still makes sense. In a recent article from the Employee Benefits Research Institute, Lori Lucas, an executive vice president at an employee benefits consulting firm, pointed out that with many employers now using automatic enrollment to get employees to use 401(k) plans, the additional incentive of an employer match seems unnecessary.
To support her claim, Lucas cited surprising research findings from professors at Harvard and Yale: When several companies eliminated matching contributions, their employee participation rates dropped only slightly. The studies concluded that if an employer aims to encourage participation, it may no longer need to offer matching funds.
You're on your own
Those who propose to dispatch employer matches are quick to suggest that the money could instead fund other employee benefits. Making automatic profit-sharing contributions, cutting fees for employees' 401(k) accounts, or enhancing other areas, like health-insurance benefits, are just a few possibilities.
Of course, companies facing falling profits in a sluggish economy may well prefer another approach: pocketing the money themselves. Consider a few of the steps companies are taking to minimize retirement benefit costs:
- General Motors (NYSE: GM ) recently cut its health benefits for retirees.
- Dozens of companies, including Gannett (NYSE: GCI ) , FedEx (NYSE: FDX ) , and IBM (NYSE: IBM ) , have frozen traditional pensions in favor of less costly 401(k) plans.
- Boeing (NYSE: BA ) plans to phase out its defined-benefit plan.
In the wake of all these cuts in benefits, you have to wonder: If your employer cuts its matching contributions to your 401(k), will you really see any offsetting benefits elsewhere?
Reaching a breaking point
Unfortunately, trends toward reducing employee benefits of all types -- including employer retirement plans -- will likely continue. In a weak economy, workers have little bargaining power to protest what amounts to major pay cuts. Meanwhile, although employees are seeing the purchasing power of their take-home pay fall due to higher food and energy costs, companies with little pricing power can't pass on higher labor costs to their customers, and therefore will likely do their best to hold the line on salary increases.
Even without an employer match, 401(k) plans still make sense for many retirement savers. Yet with their high and sometimes hidden fees and their lack of investment flexibility, 401(k) plans are a lot less attractive without free money from matching contributions. With the nation already in a retirement crisis, adding one more pressure point could prove to be the last straw for those struggling to support themselves during their golden years.
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