Saturday, November 08, 2008

“Out of” Practice

Regardless of age, regular exercise is important – but I’m at an age where the demands of everyday life (and the toll of previous “misadventures”) frequently make that impractical, if not impossible. Nonetheless – generally after I’ve been away at a conference (where the hours, food, and drink have all been beyond my usual quotas) – I undergo a renewed “commitment” to exercise. Unfortunately, once you have gotten out of the habit – well, let’s just say your body has a way of reminding you how long it’s been.

Consequently, I was concerned a couple of weeks ago when I heard that GM had decided to suspend its 401(k) match for salaried workers (see “Benefits Cuts Next on GM Agenda”). Now, the giant automaker, like many other firms, is struggling at present. And, frankly, given a choice between having a job and having a matching 401(k) contribution, I’d opt for the former every single time.

Still, in recent weeks, that’s a move that we’ve seen a number of employers make (see “Tightening Economy Drives More 401(k) Match Suspensions”), and that is reminiscent of 2003, when a series of well-known employers – names like Schwab, BF Goodrich, Goodyear Tire & Rubber Co, El Paso Corp, and Textron Inc. – took similar steps.

The sad irony, of course, is that these moves are being taken at a time when the markets are also undermining the confidence of participants. They were also coming to light at a time when a new Schwab survey highlighted the connection between the level of an employer match and participant contribution rates (see “Schwab Finds Employer Match, Employee Savings Link”).

Now, the match that GM suspended was generous by industry standards – 100% on the first 4% of employee deferrals. And it’s not like GM hasn’t been down this road before; GM cut its match in 2005 ), and they also cut it in 2001 – but in both cases, they restored it the next year, and one would hope that, in this case, anyway, history will repeat itself.

It’s worth noting, however, that the VAST majority of employers are not even contemplating suspending the company match (for an “unscientific” sampling of PLANSPONSOR NewsDash readers, see “SURVEY SAYS: What Are Your Plans for Your Match?” at ), and that the actions of few name-brand employers do not necessarily portend a trend. Still, I have heard from a number of advisers that their plan sponsor clients are “looking at” the current level of their match. Frankly, it would probably be imprudent not to.

On the other hand, like my exercise regimen, dropping, or even reducing, the match has real consequences. There’s the obvious reduction in participant account balances, of course, but – as the Schwab survey reminds us – there is also a cause and effect on participant behaviors. Take away that “free money,” and not only do participants have less incentive to save, they may even see it as a signal that they should cut back on their retirement contributions as well.

And, like any exercise regimen, once you get out of the “habit,” it’s easy to find other ways to spend that time/money – and hard to get back to doing what you know you should be doing.

- Nevin E. Adams, JD

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