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Addressing 401(k) Match Suspensions

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Communicating with participants in 401(k) plans and other defined contribution retirement plans can be challenging even when the stock market is going up an average of 20% per year and employer clients are deciding just how much to increase matching contributions.

When many of the investment funds inside plans are down 50% or more–and many employers are reducing or eliminating the match–the job can be nerve-wracking.

But benefits communication specialists say taking the time to explain what is going on and educate participants about possible responses is important.

Suspending the 401(k) plan match “can have a negative effect on the morale of the employee,” says Lynn Finklestein, national director of employee financial services at Ernst & Young L.L.P. “Employees look at this as a takeaway.”

But Finkelstein, who works out of E&Y’s Charlotte, N.C., office, says plan participants affected by match suspensions seem to appreciate employer efforts to give them information about what is happening, and why.

Charles Schwab Corp., San Francisco, drew attention to the subject of match suspensions when it coped with plummeting profits in 2001 and 2002 by suspending its 12,000 employees’ 401(k) plan match from early 2003 until January 2004.

Some other employers also did the same thing during the 2001-03 downturn, then reinstated the employer match as the economy and the job market recovered.

In 2008, only 1% of the corporate 401(k) plan sponsors served by Fidelity Investments, Boston, reduced or suspended their match, Fidelity says.

However, when Mercer commissioned a survey of 1,028 human resources and finance professionals at employers around the world in November 2008, it found that 17% said their companies were thinking about lowering the employer contributions.

Researchers at Hewitt Associates L.L.C., Lincolnshire, Ill., polled 150 large and midsize U.S. employers. About 2% of those employers already have cut or temporarily suspended the 401(k) match, and 5% said they plan to do so this year.

Employers are reducing matches at a time when employees have come to rely more heavily than ever on 401(k) plans for retirement savings and, in some cases, for emergency cash.

Under federal regulations, employers can avoid complicated antidiscrimination testing by running “safe harbor 401(k) plans.” One component of a safe harbor is an employer matching contribution.

If employers suspend their matching contributions, they will have to subject their plans to antidiscrimination testing, according to Alicia Munnell of the Boston College Center for Retirement Research.

The Internal Revenue Service set the rules for match suspensions for “safe harbor plans” in a final rule that took effect in 2004. In addition to requiring antidiscrimination testing for employers that suspend the match, the IRS established match suspension notice requirements. Employers must give plan participants at least 30 days’ notice of a reduction in or elimination of a safe harbor match, and the notice must tell affected plan participants how to go about changing their own compensation deferral and employee contribution elections.

The United States has gone through a change in administrations since the final rule was adopted, and the rules governing 401(k) suspensions have not been tested by the kind of wave of suspensions that the country has been seeing over the past few months.

Finklestein says one important step is for plan advisors to work with plan sponsors to expand and document outreach efforts.

Some experienced financial professionals who sell retirement plans may feel comfortable offering participant education services themselves, or relying on services from plan vendors.

Other sources of assistance can include law firms, accounting firms or consulting firms; employee assistance program telecounselors; 401(k) plan participant education specialists, such as the recently established Inc., Coral Gables, Fla.; consumer groups; business groups; or even government agencies.

Costs can range from almost nothing, for posting a letter explaining the match suspension along with links to helpful information on the company intranet, to hundreds of dollars per employee per year for having licensed financial planners help each participant analyze that participant’s specific needs and responses.

Ernst & Young, for example, sells a full-service education program on a fee-for-service basis. Most clients are large employers.

“We’ve actually seen an uptick in [demand for] financial education and counseling,” Finkelstein says.

In addition to documenting what kind of help is provided, one critical step is training human resources staffers and others to ensure that they do not get the employer in trouble by inadvertently providing financial planning advice or other kinds of advice that they are not trained and authorized to provide, Finklestein says.

Experts interviewed say the first step for financial professionals is to stay alert and get advice from lawyers, accountants, financial services company compliance personnel and others about what they and the firms they represent can and cannot say without violating the law, violating regulations, or exposing themselves or business partners to lawsuit risk.

For a firm without the compliance resources necessary to dot all I’s and cross all T’s, another step may be to decide whether to offer clients any extra help in the plan communications area, and, if so, to decide whether simply to give general advice about locating communications specialists or to form new alliances with communications firms.

Firms that feel as if they do have the compliance resources and other resources to handle plan communications in tumultuous times may find that this is a good time to market their expertise in this area.

At E&Y, Finkelstein says, counselors are giving messages such as, “Don’t panic,” and “Stay invested,” but also avoiding discussing future investment returns.

“We do not rely on historical averages,” Finkelstein says.

Hewitt says 91% of all 401(k) plan sponsors it surveyed will be emphasizing the importance of plan participants staying properly diversified, rather than putting all assets in stable-value investments, and that 50% will talk about the need to rebalance portfolios on a regular basis.