Cost-Cutting and Your 401(k) Plan

Company sponsored 401(k) plans can look like easy targets when budgets are being scrutinized. Some of the largest companies, including the big three automakers, have suspended their employer contributions. The Pension Rights Center maintains a list of more than 100 employers, of all sizes, who have stopped their matches since June 2008.

The trend is growing but not universal. Hewitt Associates recently reported that only 2% of surveyed employers had taken this step and 5% will join them in 2009. Hewitt does predict that the number will jump to 10% of employers who provide this benefit, depending on the length and depth of the recession.

If you are contemplating changes in employer 401(k) contributions an informed, well planned decision will minimize negative repercussions.

Ensure Compliance

There are specific requirements for the timing of changes and notifications to plan participants that include notice periods determined by your plan year. Contact your provider and discuss all of the steps and due dates for any notifications. If you do make this tough decision, don’t wait for the fallout to answer concerns communicate as much as possible. Include letters home, meetings, frequently asked questions and training for key team members who will answer questions. Be clear about the reason for the decision and consistent in this message.

Identify Plan Options

Sit down with your plan provider and look at the investment options to see if there are changes that can be made to enhance the plan. These too will have timing consequences so begin the conversation as soon as possible. Push for creativity; it’s in everyone’s best interest if plan participation grows, or at least remains at a consistent level.

When changes in employer matches are contemplated employers should request a model of likely participation to determine whether the plan will pass non-discrimination testing. Highly compensated employees may need to be limited in the amount they can contribute.

Take a step back and look at the big picture of your 401(k) plan and where it fits into your recruitment and retention. Will significant change alienate a large group of employees? Are you hiring and need to stay competitive? New approaches to an existing benefit may be the best move, before more drastic cuts are made.