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April 29, 2009
Employers Who Suspend 401(k) Match Can Save Millions, But Is It Worth It?
New research finds that most companies could save millions of dollars by suspending their 401(k) match for one year. And it's a measure they are beginning to take with greater frequency in response to continued cost pressures. But such a measure will have significant impact on employees' ability to save enough for retirement.

The analysis, by Hewitt Associates, revealed that companies can save over $1,500 per employee on average in one year by suspending their 401(k) match (based on the average employer match of 50 cents to the dollar up to 6 percent of pay).

The average small company (defined by Hewitt as having fewer than 2,000 employees) can save nearly $2 million annually, while the average mid-sized company (with between 2,000 and 15,000) can save $10 million. The average large company (over 15,000 employees) can save $25 million a year.

What's the impact on employees when companies suspend their match? Hewitt has found that employees are more likely to reduce their own 401(k) contributions or even stop contributing to their plan entirely--creating a significant negative impact on employee savings even for only a one-year match suspension.

Hewitt used the example of a younger worker who makes $50,000 a year and contributes 6 percent of her salary. This worker "will have $16,000 less for retirement than what they would have had" if their employer hadn't suspended its match for one year. If that employee decides to stop contributing as a result of her employer's suspension, that figure triples to $48,000.

Such losses in employee retirement savings are compounded by the fact that many workers who stop their 401(k) contributions in response to their employer’s match suspension, don't immediately resume contributing once the employer resumes its match. A delay of "just a few years can still deplete retirement savings by hundreds of thousands of dollars" Hewitt found. Take the same worker who made $50,000 and contributed 6 percent of her salary--if she stopped doing so for 5 years, she could have up to $150,000 less for retirement, Hewitt explained.

"Companies are making difficult decisions to keep their bottom line in the black, and the employer 401(k) match is one of the costliest retirement expenditures they sustain in a given year. Cutting this benefit to reduce costs is a much less drastic action than eliminating jobs or reducing salaries," Pam Hess, Hewitt’s director of Retirement Research, said in a press release announcing the study. "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."

To this end, Hewitt suggests alternative actions for employers to cut costs, such as decreasing rather than suspending their 401(k) match. An employer's savings from decreasing their match by 50 percent, for example, will still be significant, yet employees will still be motivated to continue contributing.

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