Study Surveys Reasons Behind 401k Employer Match Suspensions

It's no secret that lost 401k company matches have been one of the most visible casualties of the current recession. Scores of companies have reduced or eliminated 401k matches as a quick-fix cost-cutting strategy and as an alternative to layoffs. According to one study, about 5% of 401k participants were affected by employer match suspensions in 2009. (List of companies suspending 401k match.)

Although there is no legal requirement for employers to make 401k contributions, the vast majority of companies do match employee contributions to some level, according to the Profit Sharing/401k Council of America.

A new study from the Center for Retirement Research at Boston College delves into the determinants of why companies suspend matches. Their main findings are not particularly surprising: Companies most likely to have suspended 401k matches in 2009 tended to be:

1. Larger Companies
2. In the manufacturing sector
3. Exhibiting liquidity constraints

Somewhat surprisingly, neither a company's profitability nor the presence of a defined benefit pension program were significant factors in explaining match suspensions.

The study concludes:

The recent financial crisis and ensuing recession has once again sorely strained 401(k) participants. As in 2000, employees have been reminded that they are on the hook for financial risk. At the same time, it is once again clear that the employer match, a valued component of 401(k) plans, is neither mandatory nor permanent. About 5 percent of active participants in 401(k) plans have seen their employer’s match suspended. The key cause of this phenomenon is likely a lack of liquidity on the part of employers, which renders them unable to continue their previous contributions. As the crisis abates, companies appear to be restoring the match. If this trend continues, the suspensions may have done little harm and may have been better than the alternative of cutting payroll or laying off workers.

The CRR study was done at a macro-level by a correlating of company data submitted on federal form 5500 filings with financial data fro Standard & Poors. The study did not delve into the actual decision-making that leads firms to determine that they will suspend their match. For example, it would be interesting to examine whether cutting the 401k match is a first resort or a last resort in the menu of cash preservation techniques that liquidity constrained firms choose from.

Our fear is that 401k matches are becoming the cash preservation tool of choice because they can be implemented relatively easily, swiftly and have a big and immediate impact (2% - 4% of payroll). If this is the case, it does not bode well for workers who can expect to weather 3-5 recessionary period over a 40 year working career.

Bill Would Require Lifetime Income Statements Be Provided

Social Security mails benefit projection statements annually detailing the projected monthly benefit participants can expect to receive at retirement. Now, U.S. Senators Jeff Bingaman (D-NM), Johnny Isakson (R-GA), and Herb Kohl (D-WI) want 401k plans to also provide lifetime income reports. According to an announcement on Senator Bingaman's website:

The Senators' Lifetime Income Disclosure Act (S. 2832) would require 401(k) plan sponsors to inform participating workers of the projected monthly income they could expect at retirement based on their current account balance. The measure is patterned on the Social Security Administration's annual statements, which are mailed annually to working Americans to inform them of estimated monthly benefits based on their current earnings. Congress mandated annual Social Security statements in 1989, and they have proven to be very useful to workers in preparing for retirement.

By providing similar information for 401(k) plans, the Lifetime Income Disclosure Act would give American workers a more complete snapshot of their projected income in retirement.

Specifically, under the Act, defined contribution plans subject to ERISA – including 401(k) plans – would be required annually to inform participants of how the account balance would translate into guaranteed monthly payments – a "retirement paycheck for life" – based on age at retirement and other factors.

To ensure there is no material burden or potential liability on employers who voluntarily sponsor 401 (k) plans, the legislation directs the Department of Labor issue tables that employers may use in calculating an annuity equivalent, as well as a model disclosure. Employers and service providers using the model disclosure and following the prescribed assumptions and DOL rules would be insulated from liability.

As far as Congressional bills go, the Lifetime Income Disclosure Act is relatively simple and straightforward - only six wide-margin, double-spaced pages in length. The heart of the bill is comprised of three sections setting forth the type of lifetime income disclosures to be made:

1. DISCLOSURE — A lifetime income disclosure shall set forth the annuity equivalent of the total benefits accrued with respect to the participant or beneficiary.



2. ANNUITY EQUIVALENT OF THE TOTAL BENEFITS ACCRUED — For purposes of this subparagraph, the ‘annuity equivalent of the total benefits accrued’ means the amount of monthly payments the participant or beneficiary would receive at the plan’s normal retirement age if the total accrued benefits of such participant or beneficiary were used on the date of the lifetime income disclosure to purchase the life annuities described in subclause (III), with payments under such annuities commencing at the plan’s normal retirement age.
3. LIFE ANNUITIES.—The life annuities described in this subclause are a qualified joint and survivor annuity (as defined in section 205(d)), based on assumptions specified in rules prescribed by the Secretary, including the assumption that the participant or beneficiary has a spouse of equal age, and a single life annuity. Such annuities may have a term certain or other features to the extent permitted under rules prescribed by the Secretary.

Details concerning the assumptions to be used and implementation rules are left for the Labor Department to determine.

With the transition from defined benefit pensions to 401k's, Americans have been forced to assume greater responsibility for their own retirement funding. Too many are ill-prepared for the task. If the defined contribution retirement model is to succeed, it is critical that workers be better educated on retirement issues and provided good information on which they can base their savings decisions. Senate Bill 2832 appears to provide a low-cost, common-sense way to greatly improve 401k planning.

Cuts in 401k Matches are Being Reinstated

Employer matching funds have been the target of corporate cost-cutting for more than a year now. Looking to preserve cash and slash personnel costs hundreds of companies - big and small - have reduced or suspended their 401k matches. In recession, the allure to cut 401k matches is strong: 401k cuts typically equate to 2 percent or 3 percent of payroll and can be swiftly implemented.

But as the recession eases, there are strong indications of a slowdown in 401k cuts. The Pension Rights Center maintains an unofficial list of employers that have changed or suspended 401k matches. A plot of the announcements listed on their website shows a sharp fall off from levels of early 2009.

In the same vein, two recent studies (By Fidelity and Watson Wyatt) note that many companies that reduced or suspended matches now indicate they plan to reinstate them in coming months:

According to Fidelity:

Fidelity also said companies which lowered or suspended their 401(k) match in the past year are starting to reinstate the match.

The company said a survey of plan sponsors shows 27 percent of employers said they had already reinstated the match or plan to reinstate it within the next 12 months. The trend is particularly true with larger plans of 5,000 participants or more, with 44 percent of those employers indicating they have either already reinstated or plan to reinstate their match over the next year.
According to Wyatt:

In the next six months, 35% of firms that snipped away at their matching programs are planning to bulk them up again, according to a recent Watson Wyatt survey. That’s up from 24% two months ago.

The return of the 401k match is, of course, great news. Matches are easily the best incentive for employees to make (or increase) their own contributions. When employers cut matches, worker contributions invariably fall off. Hopefully, the damage done by the recent round of 401k cuts can be quickly undone.

IRS Announces 2010 Contribution Limits

The IRS has issued the cost-of-living adjustments for 2010 that affect employee benefit plans. Most 2010 limits applicable to 401k and other plans will remain at their 2009 levels.

There are several "limits" that apply to 401k plans under the Internal Revenue Code (IRC). The limits are found in various sections of the IRC. 401k plans must comply with the various IRC limits to maintain tax-qualified status. The Internal Revenue Service (IRS) annually increases 401k plan limits to reflect changes in the Consumer Price Index (CPI). Often, adjustments are made only if the change in the limit attributable to the CPI exceeds a certain threshold (e.g., $1,000 or $5,000).

The table below shows the primary 401k plan limits in effect for 2010 and 2009. Brief descriptions of the various limits are also provided.

Maximum Deferral and Threshold Limits for 2009 and 2010
Limit	2010	2009
Elective Deferral Maximum for 401(k) Plans and 403(b) Plans - IRC § 402(g)(1)	$16,500	$16,500
Elective Deferral Maximum for 457 Plans - IRC § 457(e)(15) - (below note a)	16,500	16,500
Catch-Up Limit (Age 50 and Older) for 401(k), 403(b), and 457 Plans - IRC § 414(v)(2)(B)(i)	5,500	5,500
Maximum Contribution to a Qualified Defined Contribution Plan - IRC § 415(c)(1)(A) - (below note c)	49,000	49,000
Maximum Compensation Limit - IRC § 401(a)(17) - (below note d)	245,000	245,000
Highly Compensated Employee Salary Threshhold - IRC 414(q)(1)(B)	110,000	110,000
IRA Contribution Limit	5,000	5,000
IRA Catch-Up Limit (Age 50 and Older) - IRC § 219(b)(5)(B)(ii)	1,000	1,000
Social Security Maximum Taxable Earnings – OASDI	106,800	106,800

note a - Elective deferrals are voluntary agreements in which employees elect to forego current income in return for the employer’s contributions to retirement or other benefit plans. Elective deferrals are available for a variety of tax-qualified retirement plans, including 401(k) plans.

note b - 401k plan participants who are or will be age 50 or older by the end of the plan year may voluntarily make additional “catch-up” contributions to the plan, above the maximum elective deferral limits. The maximum catch-up contribution is the lesser of (1) a specific dollar amount (the “catch-up dollar limit”) or (2) the participant’s compensation for the year reduced by any other elective deferrals made during the year.

note c - IRS limits the maximum "annual additions" that can be made to a member’s defined contribution plan account to the lesser of $49,000 in 2010, or 100% of annual compensation. In this context, annual additions include employer and employee contributions, as well as forfeitures.

note d - IRS limits the amount of compensation that can be taken into account by the plan, for the purpose of determining benefits and contributions, to $245,000 in 2010. For private sector plans, even if a plan member earns more than this amount, only $245,000 may be used in 2010 to calculate employee contributions to, or benefits provided by, the qualified plan.

How to Enhance Savings With Savvy Credit Card Use

For 401k savers who have self-control and financial discipline, credit cards can be fantastic tools to supplement their savings program. The key to effective credit card use is to pay the entire balance due each and every month to avoid any finance charges. If you can succesfully manage your credit card use, you will find your credit card to be a powerful ally for your savings campaign.

Here are nine ways that savvy credit card users can bolster savings:

1. Cash Rewards - There are several no-fee credit card that pays at least 2% cash on all purchases.
   

   Fidelity 2% Retirement Rewards Card

   Using these cards wisely for purchases like groceries, utilities and other routine items can generate significant savings. I like the Fidelity 529 Rewards Card since my immediate savings goal is college tuition for my children. But Fidelity also has a 2% card that pays rewards into a retirement account. Charles Schwab has a similar 2% card that pays into a brokerage account.
2. Pay at the Pump - I use a second credit card strictly for gasoline purchases since it pays 5% rewards for gas paid for at the pump.
   

   PFCU 5% Gas Card

   The card I use here is the Pentagon Federal Visa Platinum Rewards Card which pays 5% on gasoline purchases made at any gas station. Besides the 5% rewards, I find that the habit of paying at the pump also adds to savings by helping me avoid the impulse purchase tempatations found in gas station convenience stores.

 

3. Returns - Paying with a credit card allows you to return merchandise without a receipt. I recently found myself in a situation where I needed to return some things but could not find the receipt. Because I knew the credit card I had used, a full refund was credited to my account. Stores now cross-reference credit card purchases with UPC codes making receiptless returns possible. Credit cards make it easier than ever to return unwanted items and tap an often overlooked source of savings.
4. Float - With credit cards, you make cash outlay for your purchases on (or before) the due date of the card statement - i.e. several days or weeks after the purchase is made. This float time allows you to keep your money in an interest earning account longer than if you paid with cash, check or debit card. Over time, earnings on the "float" adds up and is significant.
5. Fraud and Theft Protection - Credit cards offer far more protection against fraud and theft than other payment forms. With cash, checks and debit cards, if an unauthorized party is able to access your funds, you have very little recourse. Credit companies, spurred by federal and state regulations, have broad coverage against fraudulent use. Here's what MasterCard's policy says:
   

   With MasterCard's Zero Liability policy, you're protected from fraudulent uses on your account. You pay only for purchases that you have authorized on your MasterCard card. As long as your account is in good standing, you have exercised reasonable care in safeguarding your card, and you have not reported two or more unauthorized events in the past twelve months, unauthorized purchases are not your responsibility.

   Additionally, credit card companies are very proactive in combatting fraud since it is a major problem for them. On several occassions I have received phone calls from my card company inquiring about transactions that had triggered suspicion in their fraud prevetion unit.

6. Buyer Protections - Buying with a credit card can give you more leverage than other payment forms in the event you have a billing dispute with a seller. If you pay up front for something (mail order, for example) with a check or debit card and the goods are never delivered, it's pretty much up to you to do the work to get your money back. With a credit card, you will have to complete some paperwork to file a dispute, but you will find that the credit card company may be far more effective in getting the retailer's attention (and a response) than you are on your own. Also, many credit cards provide extended warranty coverage on products. Typically these programs double the product manufacturer's warranty period up to one year.
7. Identify and Control Cash Leakage - I use my credit card for even the smallest incidental purchases (e.g. a soda or pack of gum). Why? For one, I like to get rewards whenever possible. But even more important, using the credit card gives me a free, no-hassle way to track and account for these purchases. The cumulative leakage caused by small cash purchases can easily become a budget buster. Getting a neat, printed summary of these purchases each month helps identify problem areas, modify spending behavior and save even more.
8. Ability to Grab Great Opportunities - Great sales and great deals don't always coincide with payday. Savvy use of a credit card gives you added flexibility to take advantage of a great deal even if you don't have funds at your ready disposal. Of course you still need have funds to pay the credit card bill when due.
9. Free Insurance - When you rent a car you'll be "encouraged" by the rental agent to purchase insurance through the rental company. One survey says that 34% of renters buy the additional insurance just to make sure they're covered. Many credit cards provide coverage (usually secondary to your main auto coverage) that may make it unecessary to purchase insurance trhought the car rental agency. Many credit cards also provide many forms of travel insurance such as travel interruption and lost baggage coverage.

Of course, if you don't pay your credit card balance in full each month, all of the savings benefits listed above will be more than wiped out by finance charges you'll pay. And keep in mind that not all credit cards offer equal services and benefits. There are many differences between cards and you always need to read and understand the detailed terms and conditions to be sure the credit card you're getting has the features you value most.

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This post is part of the latest Carnival of Personal Finance at ABCs of Investing. Check out the other great carnival entries as well.

Good Info at the Carnival of Personal Finance

The 196th edition of the Carnival of Personal Finance is now up. There are some great articles highlighted there about money management, investing, saving, retirement and much more.
My two personal favorites from the Carnival are:

• Five ways to argue Less About Money - Brief but useful tips to help you naviagate the number one source of marital discord: money issues.
• Net Present Value: Why You Should Use it in Everyday Life - A good layman's explanation of the power of using NPV to compare loans and other everday cashflow issues.

The Carnival of Personal Finance is a great way to see what's current in the personal finance blogoshere. These are articles you likely wouldn't come across with a Google search since they're too fresh to rank highly. Nonethless, there is some great information here and we recommend a visit.

Retirement Credit Cards: Side by Side Comparison

We've previously on two new credit cards that retirement savers might want to consider: Fidelity's Retirement Rewards American Express and Charles Schwab's Invest First Visa Card. Here's a side by side comparison of the major features of the two cards.

	Schwab Invest First Credit Card	Fidelity Retirement Rewards Credit Card
Type of Card	Visa	American Express
Rewards	Unlimited 2% cash back on purchases, automatically deposited into a Schwab One brokerage account each month.	Unlimited 2% cash back on purchases, automatically deposited into a Fidelity IRA account when $50 threshold is reached.
Annual Fee	None	None
Grace Period	25 Days	20 Days
APR on Purchases	14.99%	16.99%
Other Benefits	No foreign exchange transaction fees. If you qualify for a credit line of $5,000 or more, you’ll enjoy complimentary premium benefits including: Visa Signature Dining, with Zagat ratings and reviews, Visa Signature Access preferred tickets.	24-hour customer service; 0% fraud liability and identity theft recovery service; Retail purchase protection for merchandise; Travel security benefits including car rental loss & damage insurance and travel accident insurance
Requirements	To receive your 2% cash back rewards, you must link an eligible Schwab One account to your card	To receive your 2% cash back rewards, you must link an eligible Fidelity account to your card
Learn More	Schwab FAQ's	Fidelity Retirement Rewards

Retirement Rewards Credit Card

Just a few days ago we wrote about the new Charles Schwab Visa Card that could help savvy credit card users boost their retirement savings with a 2% reward.

Not to be outdone, we hear today that Fidelity has unleashed a competing 2% reward card: Fidelity Retirement Rewards Card. Like the Schwab card, there is no annual fee for the Fidelity Retirement Rewards Card nor are there caps or limits on the amount of rewards that can be earned:

Using the new Fidelity Retirement Rewards Card, investors earn two points for each dollar spent on purchases. Once a Cardmember reaches a minimum of 5,000 points, or $2,500 in purchases, points can be automatically swept as a $50 current year contribution into the user's designated Fidelity IRA. If the Cardmember has maxed out their IRA contribution for that year(6), they can continue to accrue points and restart automatic deposits to their IRA the next year. Investors also have the flexibility, at any time, to automatically redeem their rewards as cash into other Fidelity accounts or accumulate rewards and redeem them for travel, merchandise and other rewards.

This new breed of retirement credit cards promise to be a great way for many retirement savers to enhnace their savings. Unfortunately, the cards also may be wind up being detrimental to many others. The key to using reward credit cards succesfully is to always maintain control and be able to pay the card balance in full each month.

Buying things with a credit card to earn 2% retirement rewards is senseless if you have to pay 14.99% intereste on outstanding credit card balances.

New Schwab Credit Card Could Help Retirement Savings

Americans overextending themselves with debt - including credit card debt - is no small part of our current financial mess. Yet for savvy folks who can handle the responsibility, credit cards offer the most secure, efficient, and profitable method of paying bills. They key to succesful credit card use is simple: you absolutely must be prepared to pay off the card balance in it's entirety each month.

If you can do this, you can pocket some decent money in the form of cash rebates, airline miles or other rewards. I've always been partial to the Fidelity 529 Credit Card that pays me a 2% rebate on all purchases made (I have an older version of the card that is grandfathered at 2%; newer versions pay a still respectable 1.50%). Over the last 5 years, I've been able to earn more than $4,000 from this card - money paid into a 529 college savings account.

But now Charles Schwab has announced the Schwab Bank Invest First Visa Credit Card, a card that may entice me to shift from funding college costs with my credit card rewards to funding retirement. Here's the lowdown on the Schwab card:

Now there’s an easier way to put investing first: The Schwab Bank Invest First™ Visa Signature® credit card. It gives you unlimited 2% cash back on purchases, automatically deposited into a Schwab One brokerage account each month.

No cash back limits. No minimums. No annual fee.

* There’s no limit on the cash back you can earn.
* No minimum monthly purchase amount.
* And no annual fee or foreign exchange transaction fees.1
* Get a competitive variable Annual Percentage Rate (APR) on purchases, currently 14.99%.1

Again, not a credit card for anyone who carries a balance - 14.99% interest is pretty steep.

But if you're a savvy user who pays the balance in full each month, this could be a great tool to supplement other retirement savings. to find out more, follow the link above.