An employer can save an average of about $1,500 per employee per year by stopping 401(k) plan contributions.
Consultants at Hewitt Associates Inc., Lincolnshire, Ill., have published that estimate in a discussion of U.S. employers’ moves to suspend 401(k) plan employer matching contributions.
Many large and midsize employers can save millions of dollars by suspending the match for 1 year, but, because of the impact that suspensions have on employees’ ability to save retirement, employers should suspend the match only as a last resort, Hewitt consultants write.
The $1,500-per-employee savings assumes an employer matches 50% of an employee’s contributions up to 6% of the employee’s pay.
For a typical large U.S. employer, cutting that match can save a total of about $25 million per year, the consultants estimate.
The average midsize employer could save about $10 million by suspending the match, and a typical small employer could save about $2 million, the consultants predict.
But the Hewitt consultants note that many employees will reduce or eliminate their own 401(k) plan contributions once an employer suspends matching contributions.
For young workers earning $50,000 a year who contribute 6% of their salary, a 1-year employer suspension could reduce retirement savings by about $16,000, while a 1-year suspension of employer and employee contributions could reduce retirement savings by about $48,000, the Hewitt consultants warn.
Even when the employer resumes making matching contributions, workers may not immediately resume making their own contributions, the consultants write.
The consultants say possible alternatives to suspending the employer match include:
- Decreasing the match. Cutting the match may lead to big savings while continuing to motivate employees to contribute to their 401(k) plans, the consultants say.
- Communicating with employees only through online means. Moving to online-only communications can help employees cope with troubled economic times while saving money on paper-based communications, the consultants say.
- Making fees transparent. Hewitt consultants note that simply reducing 401(k) plan fund annual expenses by 0.25 percentage points can increase a younger worker’s final 401(k) plan accumulation total by about 6%.