Business news

DES MOINES, Iowa — Retirement accounts already battered by a steep market decline may get hit again as several companies suspend or reduce their 401(k) match to save cash.

Workers at General Motors Corp. and Frontier Airlines Holdings Inc., for example, potentially could lose thousands of dollars in company contributions from their retirement accounts.

GM, which has seen auto sales plummet over the summer, recently announced it was suspending company matches for its 32,000 eligible salaried workers.

"People know these actions are necessary to conserve cash and maintain viability," said Dan Flores, a company spokesman.

Matching contributions average about 11 percent of a company’s profits, according to a recent survey of more than 1,000 companies by the Profit Sharing/401k Council of America.

Now, with the economy driving profits down, some companies are forced to cut costs and look to their 401(k) contributions as a way to eliminate millions of dollars in spending.

Frontier Airlines suspended its 401(k) match on June 1 as part of a wider effort to cut costs as it works its way through Chapter 11 bankruptcy protection. The airline’s plan matched 50 percent of employee contributions, up to 10 percent of salaries. The company reported that the match cost it $4.2 million in 2006.

"This is a recession-type of response. These employers are really up against it, and they have to decide to cut somewhere, and this seems like the least bad place for them to cut," said Alicia H. Munnell, director of the Center for Retirement Research at Boston College.

Last year more than 58 million U.S. workers set aside a portion of their paycheck in a 401(k) retirement plan, and some industry surveys indicate as much as 90 percent of employer-sponsored plans provide a company match.

There are substantial savings to be had for companies large and small, but comprehensive benefits are vital to attracting top talent and staying competitive.

For workers who lose the company match, it’s essentially a pay cut, said Tom Stritikus, 38, of Seattle, who gets a match of 7.5 percent from his employer low fee pay day loans.

"People get enraged (that) they don’t get cost-of-living adjustment for one or two years," said Stritikus, an associate dean at the University of Washington. "But to think about taking an actual cut to your salary is quite a daunting proposition."

Many investors will be watching closely because suspending or reducing 401(k) matches is an echo of the 2001 recession when more than a dozen large companies including Ford Motor Co., Goodyear Tire & Rubber Co. and Charles Schwab & Co. altered their policies.

The Vanguard Group Inc. said its research indicates about 5 percent of company plans it manages suspended or reduced matches in the 2001-to-2003 recession.

Spokeswoman Linda Wolohan said it’s too early to determine whether that experience will repeat itself in the current downturn because such trends sometimes take months to emerge.

At the moment, there aren’t expectations for widespread cuts to corporate contributions. Among large corporations, it’s likely to rival the 15 or so companies that were documented in the 2001-2003 downturn.

Principal Financial Group Inc., which manages 33,000 retirement plans covering nearly 3 million workers, said less than 1 percent of its client companies with 401(k) plans changed course in the previous recession.

The Center for Retirement Research at Boston College studied the trend in 2001-2003 and found 15 companies including Prudential Financial Inc., Ford Motor Co., Daimler Chrysler and CMS Energy had suspended their contributions. Most had resumed contributing within two to three years, Munnell said.

The ability to discontinue contributions in lean times is one of the features of the 401(k) plan that makes it so attractive to employers, said Jack VanDerhei, research director at the Employee Benefits Research Institute.

"Employers want the flexibility of saying if it’s a profitable year and I have more money, I will share it with you," he said. "If it’s not a profitable year, I might lower the match or in some cases temporarily suspend it all together."

Source