Will Cost Cutting Extend to 401(k) Matching?

Companies that have been battered by the economic crisis may follow in the footsteps of General Motors, which announced this month that it would suspend its 401(k) match as part of its cost-cutting efforts.

But so far, businesses that haven't been as badly bloodied by recent events have been more inclined to look for other means of cost savings that can pack a bigger, faster punch and that don't broadcast a message of being in dire straits to their workforce. Dell Inc., which had been reducing costs aggressively even before the economic meltdown, announced it would impose a hiring freeze, offer employees voluntary buyouts, ask workers to take one to five days off without pay, and reduce the use of contract employees, The Wall Street Journal reported.

Companies that offer no defined benefit plan are particularly reluctant to stop their 401(k) match because plan participation would likely decrease. In fact, the company match usually defines employee contributions. According to a Charles Schwab report, employees base their contributions on the match ceiling, which is generally 50 percent up to six percent of compensation.

It's not the first time companies have suspended matching contributions. GM did so in the 2001 bear market but reinstated the match when business improved. During the good times from 2004 to 2007, Schwab reports seeing a steady increase in the number of employers instituting a matching feature in their plans, especially among large employers. In plans with more than 2,500 participants, the number of employers providing a match jumped from 78 percent in 2004 to 88 percent in 2007. The level of employer matches in small and mid-size plans also swelled during this period. Across all sizes of plans surveyed, the level of employer match increased just over one percent from 3.15 percent to 4.19 percent in 2007.

The consensus among benefits consultants is that most companies will think long and hard before temporarily axing the 401(k) match. But nobody knows yet when the economy will hit bottom and how comprehensive benefits spending cuts will play out.