401(k) Alert - Employees, Beware!
While the headlines in the media are all about the stimulus bill coming out of Congress and the Treasury’s bailout plan, there has been little media attention being drawn to a disturbing and growing phenomenon that is seriously impacting the potential retirement savings for employees, namely, the cutback in the corporate match for employee 401(k) plans.In an effort to cut costs, a number of companies are suspending – temporarily they say – the matching funds for retirement plans. This means that employers are relieving themselves of the costs associated with employees’ retirement benefits. Included among those companies that have made such announcements this year are US Steel, Sears Holding, Federal Express, Motorola, Kodak and General Motors. Starbucks is also considering such a move.There is nothing illegal about such decisions per se. In fact, companies are first and foremost accountable to their shareholders and in times of economic stress, cost cutting is prudent and necessary. However, cost cutting can and does take many forms and the burdens of such decisions, particularly when they impact the long term financial security of employees, must be borne in an equitable manner.For many moderately paid employees, the matching program for their 401(k) plan is one of the most valuable benefits the company offers. It provides an immediate and guaranteed return on their savings and over time can be an important component of the nest egg that is their responsibility to build.For higher paid employees, including senior management, the corporate match has much less financial impact, because their salaries and bonuses provide much of the savings for their retirement.Before the advent of 401(k) plans (in the early 1980s) most employee retirement benefits were funded solely by the employer. The employee’s pension was based upon a combination of years of service and level of pay. Such plans were logically termed defined benefits plans, and their advantage was that the employee knew precisely what his/her retirement benefit would be. However, the downside was that the money was not portable with the employee and it often took a number of years for the employee to become vested in the plan. If an employee changed jobs fairly frequently, there was possibly no pension benefit after a lifetime of work.After Congress amended the tax code (effective in 1980) a gradual but seismic shift took place, whereby defined contribution plans steadily replaced defined benefit plans. Under that arrangement, employees became responsible for saving for their own retirement. The primary benefit was that the money was theirs and they could take it with them from job to job. In return for being relieved of the liability and expense of funding employee pension plans, corporations offered to provide various levels to the employees, and today almost all publicly held companies provide some sort of matching program.The concern I have is that the cost savings incurred by companies who drop or sharply curtail their matching program do not benefit those employees. Rather those savings will be used to benefit the shareholder (which is fine) and possibly top management itself. Many bonuses paid to senior management are based upon formulas approved by the Board of Directors. If by cutting costs, those criteria for bonuses can be met, it is possible that senior management might actually still keep their benefits while depriving employees of theirs.It seems only fair that as long as any employee matching program is cut, no senior management bonuses should be paid. Let management first reinstate their employees’ benefits before being advantaged off their backs.Employees, beware! If your firm is suspending or cutting back the match on your 401(k) plan, educate yourselves on how your sacrifice is being shared with the senior management. And find out if their compensation is benefitting from your sacrifice.