Personal Finance


July 9, 2010


401(k) match not restored by half of firms, Towers Watson says

June 30 (Bloomberg) -- Almost half of U.S. companies that reduced or suspended their contributions to employee retirement plans during the recession haven't restored them, according to Towers Watson & Co.

A survey of 334 firms with more than 1,000 employees in April and May found that 18 percent reduced or suspended their contributions to 401(k) plans since September 2008 to save cash. About 49 percent of them haven't resumed their matches, the New York-based benefits consultant said.

"Some of the companies who have reinstated or who are thinking about reinstating are making the contributions contingent on profits of the company," said Robyn Credico, defined-contribution practice leader in North America for Towers Watson. "If there is ever another downturn they don't have to go through the painful experience of communicating to employees that they're suspending the match."

Companies including General Motors Co., Ford Motor Co., Eastman Kodak Co. and FedEx Corp. have restored contributions to 401(k) plans, according to the Pension Rights Center, a consumer group based in Washington. Motorola Inc., with 53,000 employees globally, reinstated its contributions to employee plans starting July 1, said Tama McWhinney, a spokeswoman for the mobile-phone maker. Sears Holdings Corp. with 290,000 U.S. workers, hasn't reinstated its match, according to spokeswoman Kimberly Freely.

The most common contribution by larger employers is 3 percent if workers save 6 percent of their salaries, Credico said. The average account balance of workers was $71,044, according to the survey, which represents more than 5.3 million plan participants.

Contribution incentive

Employer matches to workers' contributions help employees increase savings and provide an incentive for them to contribute, said Nancy Hwa, a spokeswoman for the Pension Rights Center. About 45 percent of employees ranked an employer's contribution as "very influential" on their savings, according to a separate survey of 1,000 401(k) participants released late June by New York-based BlackRock Inc., the world's largest asset manager.

An estimated 57 percent of firms automatically enroll employees into their 401(k)s and 72 percent use target-date funds as the default choice for those who don't select their own investments, according to Towers Watson.

Target-date funds move money from riskier investments such as stocks to more conservative investments like bonds as a worker reaches retirement. They attracted $45 billion last year, according to Morningstar Inc., the Chicago-based fund researcher.

A good thing

"Auto enrollment is a good thing if you default people to the right savings rate or you auto increase them over time to the right savings rate," said Credico. "If you default people to a low savings rate they are not likely to change the rate and they won't be saving enough."

Lawmakers are seeking ways to prevent Americans from outliving their savings as more workers who relied on traditional pension plans are trying to pay for retirement with their 401(k) savings.

The number of participants in traditional pension plans, where employers generally provide retired employees with lifetime payments, fell to about 19 million in 2007 from 27 million in 1975. In that same period, workers in defined contribution plans such as 401(k)s increased to 67 million from 11 million, according to the U.S. Department of Labor.

Slow adoption

Adoption of income guarantees in 401(k) plans has been slow, said Credico. About 18 percent of employers either offer annuities to participants or plan to do so this year or next, according to Towers Watson. Annuities are insurance products that can provide monthly income for life in exchange for upfront payments.

Employers have been reluctant to add them to retirement plans because of concerns about fees and potential legal liabilities for companies that select the insurers. There's also the issue of how workers who switch jobs can transfer the guarantees, said Lori Lucas, defined-contribution practice leader for Callan Associates Inc., a San Francisco-based investment-consulting firm.


July 9, 2010