Human Capital & Careers

Taking Their Lump Sums

Companies that cut matching funds from retirement plans may be sowing seeds of discontent among employees.
Josh HyattJuly 10, 2009

Some say that eliminating matching contributions to 401(k) plans is a no-brainer. But that isn’t necessarily true. The author of a new study on retirement benefits says companies that suspend or eliminate matching contributions to 401(k)s and other retirement plans may save money in the short term. However, finance chiefs may want to consider such cost-cutting measures in light of longer-term implications, particularly how corporate belt-tightening colors the thinking of former employees.

The report, based on U.S. Census data and issued by independent research firm Employee Benefit Research Institute, looks at how cutting matching benefits may contribute to the sour attitudes that former employees have toward their onetime employers. The study analyzed employees who leave their job but plan to stay in the labor force — even if they haven’t lined up another position — and decided to take lump-sum distributions from employer-sponsored retirement plans, including pensions.

The EBRI findings indicate that by nixing matching programs, and thereby making retirement accounts less appealing, employers tend to prompt workers to opt for lump-sum payouts. In turn, taking lump-sum distributions moves many former workers to think their quality of life is deteriorating, and they often place the blame for that perception on the company that cut the matching benefit — regardless of the validity of the complaint.

“Don’t suspend that matching contribution for too long,” warns Craig Copeland, a senior research associate at EBRI. “Employees understand the value of it.”

Indeed, the finger-pointing could tarnish the company’s reputation as a quality workplace. In addition, workers who believe they aren’t building up sufficient retirement assets may feel compelled to remain in a job that’s not a good fit, and consequently create workplace “issues” for management, warns Copeland.

Former employees who wanted their retirement money sooner, rather than later, were in the majority. As of 2006, more than half (56%) of the workers who had retirement-plan benefits at a previous employer received a lump-sum payment, says EBRI. Of that group, nearly 12% who spent their lump-sum distribution reported their standard of living was “much worse” at 55 or older than it had been before. Meanwhile, 4.3% of those who rolled over their funds said their standard of life had gotten worse.

About 47% of those taking lump-sum distributions plowed back a portion of the money into a tax-qualified savings account, and nearly 17% “consumed” a portion (buying a home, paying off debt, and starting a business were the most prevalent uses named). Workers over 50, and those who received distributions of more than $50,000, were more likely to roll them into tax-advantaged savings accounts.

Individual retirement account (IRA) assets grew when the economy was better, Copeland notes, but rollovers have decreased in the past three years. “An extended recession,” he adds, “could mean that people have to access that money. They’ll have nothing to retire on but Social Security.”

Copeland thinks that “in some cases, people may be better off accessing the money — if they would otherwise have to declare bankruptcy or take on more debt.” However, “if more people spend their distributions, we will have more people in the future saying that their quality of life has gone down in retirement.”

Overall, more than 16 million workers received lump-sum distributions from employer-based retirement plans as of 2006. The average distribution was about $32,000, while the median reached $10,000.

One reason employees might be more inclined to take the lump sum — absorbing not only a 10% tax penalty but also accumulating more taxable ordinary income — is that their new employer doesn’t make matching contributions to its plan. “The match is a big incentive,” Copeland told

Companies ranging from Xerox to the nonprofit AARP (formerly the American Association of Retired Persons) have stopped matching contributions to save money. A Grant Thornton study estimates that about 30% of employers will have altered their 401(k) matches by year’s end. Of those, two-thirds will stop matching altogether, at least temporarily.