GuidePost

The GRABot BAG
by Sherrie E. Grabot, CEO

July 2009
Is the Employer Match Dead?

On the perennial Internet quiz topic of “optimist/pessimist,” I tend to maintain a glass-half-full outlook, even in the worst of times. I suspect it’s a common trait among those who work with historical averages and long time horizons. But when 25% of companies eliminate the employer match that helps drive our entire industry, it’s hard for anyone to say “hey, at least that’s less than half.”

If that number seems depressingly familiar, it’s because it was the topic of the last issue of GuidePost. Since then the story has gained momentum in the press, and provoked some reflection on what the endangered status of the match may mean in the greater scheme of things. Taking the long view, one can look at the subject not as an isolated event, but rather as an episode in the complex, evolving relationship between employers and employees. As such, it’s worth revisiting.

The Evolution of the 401(k) Match
In this space last month, I cited a worrying trend among employers: more than 25% of all employers have dropped their 401(k) match in response to a difficult economy. I outlined some of the admittedly hard choices participants can take to help keep their retirement savings on track. I also made the case for plan sponsors, providers, and consultants (that’s you, dear reader) to help pick up the slack with focused, forceful communication.

But as it turns out, there’s more to the story.

A key assumption is that match cuts are a temporary phenomenon, and a recurring one. According to David Wray, President of the PSCA, after the 2001 recession “every single company that suspended their match reinstated it, unless they went out of business.”

However, that may not be the case this time around. We’re often told that the current downturn is ‘different’ in various ways. “One lasting effect of this deep recession is that it’s changed the mindset of many business executives,” says consultant Mark Ritter, quoted in an AP story frighteningly titled “Recession: The Death of the 401(k) Match?” “People realize that the floor can fall out from under them now and they want to stay loose.”

Life Support, or a New Lease on Life?
One way companies may keep their options open is by tying any future match to profitability. Sprint Nextel, for example, has suspended their match indefinitely, and has gone on the record to say it will only come back when the company’s financial performance reaches a certain level. Even then, the match will draw only from a specified pot of money, rather than contributing a percentage of salary, and will be revised each year. In effect it will become a species of profit-sharing plan.

Another option is to keep the match alive, but look at it more critically as part of the total benefits package. Starbucks is one major employer to take that path. In 2008, the company switched from a guaranteed, fixed match to a discretionary one. They recently announced that due to relatively strong performance they will keep the match for 2009. But at the same time, to meet the challenge of rising healthcare costs, they will raise employee contributions for health coverage by up to 60%.

By offering their “special blend of employee benefits” to a largely low-paid, part-time workforce, Starbucks has earned a reputation as a progressive employer, and as such they may be worth watching for a preview of the future. If what we’re seeing is a broad trend away from fixed commitments and toward a more flexible program, does this represent a woeful retreat from the employer’s commitment to employee well-being? Or is it a reasoned attempt to balance competing financial priorities, and hedge against the uncertainty of healthcare reform, to craft the most effective benefits package? That depends: are you a pessimist, or an optimist?

Letting the People Lead
It’s worth noting that employees themselves are taking a similar tack. Cafeteria plans, multiple coverage tiers, HSAs, and other “consumer-driven” benefit programs are encouraging workers to make the most of employer-provided resources by designing the benefits package that best suits their needs – a long-term trend that began with 401(k).

Unfortunately, some workers are also facing difficult decisions about how to spend their own resources. Saving for retirement and paying for health care should not be mutually exclusive, for the employer or the employee.

What To Do?
The big variable in this equation is really very simple: the amount of money that’s actually available for retirement investing. There’s nothing we can do about the economy, nor do we have much leverage to convince employers to retain, revive, or reinvent the match. Our job is essentially the same as it’s always been: to make the investment process as inclusive, efficient, and effective as possible. To that end, here are some starting points.

Maximize participation. Employees with access to plans need to use them, match or no match. 401(k) is still a powerful vehicle for building retirement savings, and it’s more important than ever to ensure participation, contribution, and adequate asset allocation. Despite some recent speed bumps, and perhaps against the broader trend toward consumerism, we feel the best way to maximize coverage is through automatic participation and sensible default asset allocation.

Increase fairness. People are already unhappy with their 401(k) plans. Ongoing concerns about issues such as hidden fees and revenue-sharing only make matters worse. This business is founded on trust. We should work toward greater transparency and fairness, rather than the nickel-and-dime revenue model typically associated with mobile-phone carriers and rental cars.

Provide advice. By now, this one should be a no-brainer. But until advice is universally available and widely adopted, we’ll continue to advocate for it – from this newsletter to Capitol Hill.

Work with employers. Employers sometimes need a gentle reminder that the retirement plan is one of the most important aspects of their compensation package, right up there with health benefits. Even today, a strong program is essential to attract and motivate the talented employees who will eventually drive a recovery.

Communicate with employees. Making plan contributions is still critical, especially if there’s no match. I’ve already offered some tips on communicating to participants in the previous issue.  The most important point is that for all that the plan sponsor and provider may do to help, the responsibility to prepare for their financial future is ultimately theirs and theirs alone. While the events of the past year have been confusing in many ways, that fact at least should now be abundantly clear.

~~ Sherrie