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.