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Survey Results (Excel spreadsheet)
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Richard Kelecy wasn't expecting employees to cheer the news in 2009 that WRScompass, an environmental cleanup and construction firm, had decided to suspend matching contributions to its 401(k) plan. But their reaction still felt like a bucket of cold water in the face.

"The news was not well received at all," says Kelecy, CFO of the 500-employee company. While the suspension of the 401(k) match was part of a cost-cutting plan that included a two-year salary freeze and an increase to employees' share of health-insurance premiums, Kelecy says that halting the employer contribution stung in a way that the other cuts did not. "Employees understood that the poor economy could affect their spendable cash," Kelecy says. "But they were very upset that the hit to their nest eggs came on top of the market losses [their retirement accounts] were suffering."

Some engineers were upset enough to leave for greener pastures, which is never a good thing given how hard it can be to fill such positions. But Kelecy says a bigger problem may materialize later, if the impact to morale prompts more employees to leave once the economy improves.

To be sure, a 401(k) match is perceived as a highly desirable benefit, which may explain why, even at the cost-cutting peak of the recession, only 15% to 30% of plan sponsors suspended their matches. And studies have found that 50% to 80% of those companies that did suspend their matches have either reinstated them already, at least partly, or plan to within the next two years.

Different Strokes
But history suggests that CFOs will again confront difficult decisions about rescinding and restoring company contributions. In each recession that occurred after IRS Rule 401(k) took effect in 1980, some companies put their matches on hold, notes Edward Lynch, managing director and chief retirement officer at investment-planning firm Dietz and Lynch. That begs the question, Did CFOs learn anything this time around that will help them decide what to do next time?

Kelecy says he did. "We had to do all we could so the company would survive," he says. "But if presented with the same scenario, I would want to reinstate the match sooner."

Even so, WRScompass is moving cautiously. It was scheduled to restart plan contributions on January 1 after approximately two years, but at only 50% of employees' contributions up to 2% of their salaries, a contribution only one-third the previous level. And even that move was delayed by a quarter, until April 1. "We agonized for nine months about what to do," Kelecy says, noting that the privately held company's profit margin is still far from what it was before the recession.

Finance chiefs say there are many overlapping factors to consider when thinking about 401(k) suspensions, layoffs, and pay freezes on the one hand, and the potential cost to morale and retention on the other. It can't be boiled down to an equation or formula, says Cal Stuart, CFO at Aquion Water Treatment. Hard cost savings are easy to add up, while the financial impact of a disengaged workforce and the loss of key staffers is more difficult to gauge, but just as real.

CFOs weigh those factors in the light of their own companies' situations and often reach different conclusions. For his part, Stuart says he leans toward making sure employees remaining after a layoff are rewarded appropriately. (Aquion laid off 25% of its workforce and froze pay a year before suspending its 3% contribution. The contribution had not been reinstated by press time.)

On the other hand, Randy Lay, CFO at Lazydays, a large recreational-vehicle (RV) dealership, says next time he will be quicker to cut employee-related expenses, including head count and salaries, as well as 401(k) expenses. "We hoped the downturn was not going to be as severe as it ended up being, which made us slow on the trigger," he says. But the company, which saw its revenue decline by 30% in 2008 and 2009, has recovered enough that it is tentatively slated to restore its match to prerecession levels on July 1.

At publicly held MarineMax, a dealer of recreational boats and yachts, the recession took a serious toll. Revenue plunged from almost $900 million in 2008 to half that amount in 2010. But the company did manage to attain positive cash flow as last year wore on, and its suspended 401(k) match was partially restored late last summer.

MarineMax CFO Mike McLamb says he has learned from the experience that companies should diligently avoid letting nice-to-have but less-than-crucial expenses creep back in as times get better. But he doesn't include the matching 401(k) contributions in that category. "It's an important thing," he says. "We'll pull other things out of the expense structure before that."

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