CHICAGO (Aug. 10, 2010) — Economists heralded FedEx Corp.'s decision to restore its matching contribution to employees' 401(k) plans as a sign that the recession is ending, but surveys show that less than half of firms that reduced or suspended plan matches in recent years have restored them.
Citing an improved earnings outlook, Memphis, Tenn.-based FedEx last week said it would fully restore its 401(k) plan matching contribution effective Jan. 1, 2011.
FedEx—which in 2008 had sweetened its match to 100 percent of employee deferrals on the first 1 percent of pay and 50 percent on deferrals up to 5 percent of pay in conjunction with a plan redesign—cited an earnings slump amid an ailing economy in suspending the match effective Feb. 1, 2009.
FedEx wasn't alone among major firms reducing or suspending their 401(k) plan matching contributions in 2009. Less than half have restored the reductions since then.
Although roughly the same number of employers suspended or reduced their 401(k) plan matches during another weak economic period from 2000-2001, benefit consultants say the rate of match restoration is a bit slower this time around.
As employers move to reinstate those contributions, some are altering the way they calculate them and, in some cases, linking them to company profitability, the consultants say.
Since the financial crisis came to a head in September 2008, between 8 and 18 percent of employers either reduced or suspended their match of 401(k) plan contributions, according to various surveys by benefit consultants.
For example, while Boston-based Fidelity Investments' March survey of 293 plan sponsors pegged the suspension rate at 7.9 percent, Towers Watson & Co.'s April survey of 334 plan sponsors put the suspension rate closer to 13 percent, and 5 percent reduced the match.
The restoration rate is a bit slower than the economic downturn at the beginning of the decade, said Beth McHugh, vice president of market insights at Fidelity Investments in Boston. More than half of the 8 percent of plan sponsors that either reduced or suspended their matches in 2000 or 2001 reinstated them by the middle of 2002; that compares with just 44 percent as of March, she said.
Although Hewitt Associates Inc. said in a February survey that 80 percent of employers that suspended or reduced their company match last year were planning to restore it this year, only about one-third have done so, said Byron Beebe, Hewitt's Cleveland-based U.S. retirement market leader.
“We did expect that a large number would put the match back in 2010,” Mr. Beebe said. Companies that restored the match usually accompanied other good company news, such as improved earnings, he said.
David Wray, president of the Profit Sharing/401k Council of America in Chicago, attributed employers' hesitation in part to dÃ&Copy;jà vu in that it wasn't long ago that they were implementing similar suspensions and cuts because of an ailing economy.
“It's the lack of confidence in the future. Companies don't like to make commitments to their employees and withdraw them. It's not good for the morale of the workforce,” Mr. Wray said.
Particularly in industries recovering more slowly from the recession and credit crisis, those employers have been reluctant to reinstate their 401(k) matching contributions, said Jack Abraham, principal and head of the benefits practice at PricewaterhouseCoopers in Chicago.
“There are certain industries this time that are not recovering—for example, the construction materials industry,” Mr. Abraham said. “With prices depressed, they haven't been able to reinstate those types of benefits because they're still losing money.”
To ensure that they don't make promises they may not be able to keep, some employers are making 401(k) contributions contingent on company profitability, benefits consultants say.
“We are seeing some be discretionary about their match so they won't put themselves in the position to make deadlines when they have to go through this again,” said Bill McClain, a principal at Mercer in Seattle.
Rather than matching employees' regular payroll contributions, “they are contributing a percentage of pay at year-end depending on how well the company performs,” said Leslie Smith, senior vice president in the retirement practice at Aon Consulting in Somerset, N.J.
Overland Park, Kansas-based Sprint Nextel Corp., for example, which had matched employee 401(k) plan contributions up to 5 percent of salary, revamped its plan in March 2009 to match contributions only up to 4 percent of salary provided the company exceeds its operating income target by at least 10 percent, a company spokesman said.
This report appeared in Business Insurance magazine, a Chicago-based sister publication of Tire Business.