Will 401(k) matches fall victim to coronavirus pandemic?
Employers feeling the economic strains from the coronavirus pandemic have a benefit on the chopping block: 401(k) contributions.
A range of industry forecasts find that fewer than 1 in 10 employers have indicated plans to suspend or reduce contributions, though many more companies are in wait-and-see mode, meaning numbers might jump exponentially in the coming months.
Overall, about 6% of companies have reduced or eliminated employer contributions or matches to their retirement plan, according to a survey of 369 firms by consultancy Pearl Meyer. But 16% said they were considering doing so. Fidelity Investments says it polled 1,000 employers and found that about two-thirds are not planning to suspend or reduce the match, and less than 10% of employers surveyed indicated they have or are planning to suspend or reduce their match.
Robyn Credico, Willis Towers Watson’s defined contribution consulting leader, says she’s been fielding a lot of calls from employer clients about the financial impact of suspending matches, but the majority haven’t made up their minds about their plans just yet.
“Right now, a lot of employers haven’t done that, but employers are preparing if they need to do it,” she says.
A lot of the companies that have already made changes—or are considering doing so—are in industries taking a big hit from the outbreak, such as travel and leisure, retail and others, she says. Amtrak, Marriot International and La-Z-Boy are among a first wave of companies that have suspended 401(k) matching contributions as a result of the coronavirus pandemic.
“For many, it’s a last resort,” Credico says. “But the objective is to pay people and keep them on their jobs, so a lot of [the viewpoint] is, people would rather keep their job and wait on a 401(k) match than get laid off.”
Employer contributions run the gamut. Fidelity says its most popular match on its 401(k) platform is 100% match for the first 3% contributed by the employee, and then 50% match for the next 2% contributed. About 40% of the 401(k) plans managed by Fidelity use that formula, the firm notes.
Scaling back on 401(k) contributions is often a strategy embraced by HR and benefits leaders during economic downturns. During the Great Recession in 2008, nearly a quarter of employers halted or decreased 401(k) contributions.
It’s no surprise that companies may once again make that choice, industry insiders say, especially if they’re faced with reducing staff as an alternative—or worse, closing altogether.
“Industries that have been hit hard by coronavirus are looking for every means possible to stay afloat,” says John Lowell, an Atlanta-based partner with October Three Consulting. “While matching contributions have become customary in many U.S. companies, these companies are considering them a luxury that they cannot currently afford.”
Cutting back on matches, though, does have a big financial effect on employees—another whammy as many already are witnessing dropping balances in their accounts due to stock market volatility.
Experts say it’s important for HR and other corporate leaders to encourage employees to keep contributing to their employer-provided accounts, and that they tout the benefits—tax advantages, improved financial wellbeing and so on—of doing so.
“They will want to tell them to still contribute if they can, even if they are no longer contributing themselves,” Credico says. That may be difficult advice for employees to follow, though, if history is any indication. Roughly 20% of employees in 401(k) plans that suspended matching contributions in 2008 stopped saving in their 401(k) plans entirely that year, according to the Employee Benefit Research Institute.
For many, a temporary change
What’s important to note, many experts say, is that employer contribution halts are often temporary when motivated by a financial crisis.
When the economy began to rebound after the 2008 financial crisis, most retirement contributions were reinstated. Fidelity says that following the recession, nearly half of the plan sponsors that reduced their match reinstated them within a year.
It’s likely the vast majority of employers will restore contributions as a competitive advantage after the pandemic and its economic fallout pass too, Credico says. Employer-sponsored retirement accounts—with employer contributions—have long been a recruiting and retention tactic, with employers beefing up contributions as a way to keep talent.
“If you have to furlough or lay off people, you want to be in a competitive position to rehire those people because you want your business to grow again,” Credico says. “And for the employees you have as part of your company, you want to help them be prepared to retire and retire with a meaningful amount of money.”