Eliminating the 401(k) Match: Penny Wise, Pound Foolish?

Posted on April 20, 2009

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Last week, Hewitt put out an analysis of U.S. companies suspending their employer 401(k) matches. “Companies Can Save Millions of Dollars by Suspending Their 401(k) Match for Just One Year,” announced the headline of the accompanying press release. According to the press release:

[C]ompanies can save, on average, more than $1,500 per employee each year by suspending their 401(k) match, assuming the average employer match of 50 cents to the dollar up to 6 percent of pay.

To be fair, Hewitt does recommend that employers suspend 401(k) matching contributions only as a last resort. But it’s interesting to note the reason given is “due to the significant impact it has on employees’ ability to save enough for retirement.”

True enough, but what about the effect on employees’ morale, motivation, and willingness to go the extra mile for an employer? As Pamela Yip writes in today’s Dallas Morning News in an article about the Hewitt study: “You hurt the very employees you’ll need to help your company get going again as the economy recovers.” Employees at companies where the employer match has been reduced or eliminated are not only getting fewer dollars flowing into their 401(k) accounts; they have less going into retirement accounts at precisely the time when markets are down significantly, and stocks are far less expensive than they’ve been in years.

The phenomenon of companies suspending their matching contributions is still of relatively recent vintage, and I am unaware of any studies or surveys that have attempted to measure the effect on employee engagement. But it’s certainly reasonable to assume that cutting employer matching contributions is not going to have a positive effect on employee motivation.

The Hewitt study pegs the annual savings to employers at anywhere from $2 million to $25 million, depending on company size. But employers would be wise to consider carefully whether the dollars saved, significant though they may be, outweigh the longer term risks to the company and brand that could arise from workers who feel that employers were too quick to pull the plug on a key component of their total compensation.