Workers Watching 401(k)s Tumble See Employers Squeeze Them Too

Companies are starting to suspend, defer or shrink the amount of money they match in workers’ 401(k) accounts, with Sabre Corp. and Marriott Vacations Worldwide among those first out of the gate.

If the 2008 financial crisis is any guide, more are almost certain to follow due to the current novel coronavirus-fueled economic downturn. FedEx Corp., Motorola, Resorts International, and General Motors were among the household names that cut or reduced matching contributions to employer-sponsored retirement accounts.

In many cases, the cuts were temporary. Of 231 large companies that suspended their matches in 2008 and 2009, 75% had reinstated them by 2011, according to a Towers Watson survey.

For workers, even a one year suspension of matching contributions can be costly. Take for example an employee making $75,000 per year with an employer matching 5% of their salary. That amounts to $3,750 that won’t get stashed away for retirement--and compounded over time with lost interest, it can lead to a significant dip in retirement savings.

Teresa Ghilarducci, a New School for Social Research labor economist, said the post-financial crisis 401(k) contribution rollbacks didn’t generate much resistance from shell-shocked workers “just happy to have a job.”

“There was no backlash from workers,” Ghilarducci said of the 2008 benefits changes. “So I suspect we’ll see more of that behavior next week. Or next month.”

Fielding Questions

So far, the pandemic is mostly generating questions among employers. The uncertainty has prompted benefits lawyers and financial advisers to rush out refreshers about retirement policy in recent days.

Amy Reynolds, partner at consulting firm Mercer, said her group is already fielding questions about potential tweaks to benefits offerings.

Mercer is recommending alternatives to outright cuts such as dialing back auto-escalation increases that raise employee contributions each year, or shelving matching contributions for highly compensated personnel first, Reynolds said.

“There is a focus on preparedness and contingencies,” she said of the current discussions.

Critical Decisions

Large employers looking to cut costs during the last financial crisis faced some critical decisions, said Robyn Credico, managing director for retirement at Willis Towers Watson.

The most detrimental would have been to lay off or furlough staff. Adjusting health-care costs or retirement benefits, such as matching contributions, were considered much more palatable.

“That’s a preferable outcome to most people. The other is, I lose my job and don’t get any benefits,” she said.

Alternatives WTW consultants are discussing with concerned business owners this time around include capping benefits for higher paid staff or delaying matching contributions across the board until the end of the year, Credico said.

Lynn Dudley, vice president of global retirement policy at the American Benefits Council, predicts that “retirement savings is going to take a hit” no matter what employers or lawmakers do to try and mitigate the damage.

The Senate-passed Coronavirus Aid, Relief, and Economic Security Act includes provisions waiving tax penalties on hardship withdrawals and allows account holders to pull out or loan themselves up to $100,000 in emergency funds. The House is expected to vote on the $2 trillion virus relief package Friday.

The Long Haul

The last recession led 89% of the 260 large employers Towers Watson surveyed in 2009 to suspend their matching contributions, while 11% of respondents opted to reduce their matching funds.

A follow-up Towers Watson study in October 2011 found that 80% of the suspensions and reductions took place between January 2009 and April 2009. The data shows that others were still cutting contributions as late as April 2010.

Among those who eventually restored employer-funded contributions, 74% resumed paying at the same rate as before the rollback, 23% trimmed their reinstated contributions by half, and 3% contributed more than before.

The reinstatement period stretched from August 2009 to April 2012, according to the Towers Watson report.