Hewitt Says Employers Could Save $1500/Employee With Match Cuts

April 13, 2009 (PLANSPONSOR.com) - With some employers suspending or cutting their 401(k) match to save money, a new Hewitt Associates study finds employers could save as much as $25 million by taking the step.

A Hewitt news release claims that companies can save, on average, more than $1,500 per employee each year by suspending their 401(k) match, assuming an average employer match of $0.50 cents on the dollar, up to 6% of pay.

So, Hewitt asserts, a typical large U.S. company could see annual savings of $25 million a year, while the average mid-sized company can save more than $10 million, and the average small company nearly $2 million annually

Suspension Breaches?

However, Hewitt notes that research has shown that suspending the company match negatively impacts employee participation and contribution rates. Once the match is suspended, employees may reduce their own 401(k) contributions or even stop contributing to their plan entirely. As a result, employees’ retirement savings shrink by thousands of dollars due to that one-year suspension. For example, a younger worker earning $50,000 a year who contributes 6 percent of his/her salary will have $16,000 less for retirement than what they would have had if their employer hadn’t suspended their match for one year. That number jumps to $48,000 if the employee stops contributing during that year as well.

Additionally, many workers who stop contributing to their 401(k) when their company suspends their match don’t immediately resume contributing once their employer reinstates it. While they may eventually start saving in their 401(k) again, Hewitt finds even a hiatus in savings of just a few years can still deplete retirement savings by hundreds of thousands of dollars. For example, a younger worker earning $50,000 a year who stops contributing 6 percent of his/her salary for five years can have up to $150,000 less for retirement.

“Companies are making difficult decisions to keep their bottom line in the black, and the employer 401(k) match is one of the costliest expenditures they sustain in a given year,” said Pam Hess, Hewitt’s director of Retirement Research.

“However, suspending the match has a significant impact on employees. Not only does it dissuade many workers from saving in their 401(k), but it also adversely affects their ability to save enough to retire. We believe employers should suspend their match only as a last resort. There are less drastic steps they can take to lower costs while still preserving the incentive for workers to save for retirement.”

Alternative Approaches

Instead of cutting 401(k) matches, Hewitt notes the following alternatives that can help employers mitigate immediate cost pressures while still encouraging workers to invest wisely for retirement:

  • Decrease the match: The average large employer can save nearly $13 million each year by decreasing their match by half instead of suspending it entirely. This still motivates employees to continue contributing to their 401(k), even if at a lower rate.
  • Communicate to employees only through online means: Hewitt research shows that employers believe communication is a critical tool in helping their employees save properly for retirement, particularly during these troubled economic times. Three-quarters (75 percent) of companies are using their intranet site, 60 percent are making use of e-mail blasts, and 49 percent are using Webinars. Still, many employers use printed materials in addition to online tools to communicate with employees. By moving to online-only communication, employers can effectively reach their employees while saving money on paper costs.
  • Make fees transparent: Employers should take a closer look at the funds they offer in their 401(k) to ensure they do not carry high expense ratios. Hewitt research shows that additional annual expenses of 0.25 percent-the difference between the typical institutional fund and retail mutual fund portfolio-can reduce projected retirement income substantially over time. For younger employees, these higher costs can erode 401(k)-related retirement income levels by nearly 6 percent by the time these employees reach retirement age.