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.