Human Capital & Careers

Stopping 401(k) Matches: The New No-brainer

At least 40 employers have stopped contributing to their employees' defined-contribution plans.
David KatzJanuary 29, 2009

On a day like Monday, when five big companies reported a total of at least 57,000 layoffs, it was easy to see why CFOs might want to stop providing a match to employees’ 401(k) savings. In many cases, it’s an easy way to cut a cost worth 2 percent or 3 percent of your payroll without having to give employees more than a week’s notice.

What’s more, cutting out the matching funds an employer contributes to a 401(k) wouldn’t be unexpected in these tough times. And in lieu of a layoff, the elimination of the match can seem almost merciful.

A fast-rising group of big-name companies have taken the hint. Stretching from last June until January 26, 40 employers have announced plans to change or cease their 401(k) matches, according to a non-comprehensive list put together by the Pension Rights Center, a nonprofit consumer-rights organization. And that’s a smaller population than the companies that actually have done it, notes Alan Vorchheimer, a defined-contribution-plan adviser with Buck Consultants in New York City, who says he knows “companies where it doesn’t get out to the media because it’s part of a bigger financial restructuring.”

In comparison to other ways of cutting costs, “this is just so easy,” says Vorchheimer. “It’s just right there. It’s one decision. You pretty much can estimate the amount [you’ll save]: You can look at your payroll and look at what you contributed last month.”

While there are many variations in matching formulas, an employer pay-in of 50 percent up to the first 6 percent of payroll that employees contribute is increasingly considered the standard. Since it’s unlikely that every employee will contribute to the plan and such forms of compensation as bonuses and overtime pay may be excluded as a basis for employer contributions, a typical plan sponsor ends up paying out 2 percent to 3 percent of payroll, the consultant figures. Further, most plan sponsors can revoke the match with no advance notice, he says. One exception: Employers operating under certain IRS “safe harbor” rules must give their employees 30 days notice of a change in matching policy.

Often, recent match suspensions have come buried under piles of more drastic cost-cutting measures. In a December 18 press release reporting on FedEx’s second-quarter earnings, for example, the shipping company said it was suspending 401(k) company matching contributions for a minimum of one year. That was the last item in a bulleted list that also included layoffs, a hiring freeze, cuts in labor hours, and executive pay cuts. More recently, Saks Inc. announced such a suspension in tandem with 1,100 job cuts and a freeze in merit raises.

Sometimes, news of a 401(k) match cut precedes the issuance of a company’s 10-K or 10-Q and doesn’t make it in. On December 24, for instance, Starbucks said in a letter to employees that it would make its automatic matching plan discretionary, The Wall Street Journal reported. The newspaper noted that the coffee company’s routine match was between 25 percent and 150 percent of the first 4 percent of eligible workers’ pay, depending on length of service.

On Wednesday, as the coffee company reported a 6 percent drop in fiscal first-quarter, year-over-year revenues ($2.6 billion, down from $2.8 billion), it also announced that it was closing 300 underperforming shops worldwide and that it could eliminate as many as 6,000 jobs. Since the company had not actually suspended its 401(k) match, however, there was nothing to report in the financials.

Mostly, notes Vorchheimer, the first wave of match-slashing has come from among industries hit hard by the financial crisis: car makers, retail stores, hotels and lodging establishments, and media organizations. (Interestingly, no representatives of the financial services industry, and only one real estate company — Cushman & Wakefield — are on the Pension Rights Center’s list of companies that have announced plans to cut their matches.) In such industries, companies may no longer feel they need to provide matches to compete for employees, he thinks.   

Conversely, employers in industries that are so far holding up in the face of the recession may see a need to maintain their matches. Such is the case at AEP, one of the nation’s biggest generators of electricity, which increased its match earlier this month so that it could meet IRS safe harbor guidelines enabling its employees to contribute more into the plan. Overall, the energy company tries to make its benefits package comparable with those offered by its competitors so that it can do a good job of recruiting and retaining employees, according to Curt Cooper, AEP’s director of employee benefits.

The company now contributes $1 on the first 1 percent and 70 cents on the next 5 percent of eligible compensation that an employee contributes from each paycheck. Thus, if an employee contributes 6 percent, the match is 4.5 percent.

At least one company has gone a good deal further than holding the line on its existing matching policy. On December 15, Dollar Thrifty Automotive Group reported that it would reinstate its 401(k) match starting this month after suspending it in 2008 “due to worsening economic conditions.” The car-rental company said it would match employee contributions dollar-for-dollar up to 2 percent.

The reason? The company’s board and management felt strongly “that reinstating the 401(k) match for employees is the right thing to do,” said president and chief executive officer Scott Thompson. (Asked by on Wednesday whether there are financial advantages to reinstating the match for the company itself, Dollar Thrifty CFO Cliff Buster said he’d he’d prefer not to comment for this story.)

Overall, however, the trend seems to be heading swiftly in the direction of ceasing matching contributions. “Almost every company is being forced to consider it,” says Vorchheimer. “Let’s be candid: the CFOs of a lot of these companies are going to their benefits people and saying, ‘Hey, can we get rid of our match?’ “