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Monday, December 22, 2008

So much for the promise of 401(k)s replacing pensions due to the magic of the company match
Posted by Jill | 4:52 AM
What they didn't tell you was that the company can decide to rescind the match at any time:
Companies eager to conserve cash are trimming their contributions to their workers’ 401(k) retirement plans, putting a new strain on America’s tattered safety net at the very moment when many workers are watching their accounts plummet along with the stock market.

[snip]

For workers, the loss of a matching contribution heightens the pain of a retirement account balance shriveling away because of the plunging stocks markets.

“We are taking a beating,” said another FedEx mechanic, Rafael Garcia. “In a year, I lost $60,000 of my 401(k). You can’t make that up.”

To many retirement policy specialists, the lost contributions are one more sign of America’s failure as a society to face up to the graying of the population and the profound economic forces it will unleash.

Traditional pensions are disappearing, and Washington has yet to ensure that Social Security will remain solvent as baby boomers retire and more workers are needed to support each retiree.

The company cutbacks may mean that some employees put less money into their retirement accounts. Even if they do not, the cuts, while temporary, will have a permanent effect by costing many workers years of future compounding on the missed contributions. No one knows how long credit will remain scarce for companies, or whether companies will start making their matching contributions again when credit loosens and business improves.

“We have had a 30-year experiment with requiring workers to be more responsible for saving and investing for their retirement,” said Teresa Ghilarducci, a professor of economics at the New School. “It has been a grand experiment, and it has failed.”

In the typical 401(k) plan, the employer’s matching contribution is more than just money for retirement. It also motivates employees to set aside more of their own money for old age. The more that workers save in a 401(k) plan, generally, the more “free money” they can get from their employers under the matching provisions.

Retirement policy specialists said they did not expect employees to react immediately to the loss of this incentive by stopping their own contributions. Study after study has shown that employees procrastinate when it comes to retirement-plan chores, and in this case the inertia may work, unwittingly, in their favor.

Americans, however, are facing extreme household financial pressure. President-elect Obama has said that he would support allowing withdrawals from retirement plans without penalties, which would provide short-term relief but would further undercut American’s long-term savings.

Benefits specialists said that if matching contributions continued to dwindle, fewer newly hired workers could be expected to join 401(k) plans. And employees might eventually slow or stop their contributions if the recession drags on and their own cash runs short.

“The problem is, we are heading into this serious recession, and we don’t know how long it will go on for,” said Alicia Munnell, director of the Center for Retirement Research at Boston College. “The bottom line is, people will have less money in their 401(k) plans, not just because the financial crisis has decimated their assets, but also because they will not have the employer match for some time.”


The employer match was always the carrot that went with the stick of having money taken out of your paycheck that you in theory never see until retirement. The match on X percent was designed to encourage you to put away that X percent or more. Without that match, a 401(k) is just another investment account on which you pay fees; another way to get you to put your money with the very people who ran their companies into the ground and then asked for a bailout from the government. For those of us lucky enough to have had a good employer match during this downturn, it's cushioned us against some of the blows from declining financial markets. My account with my previous employer has only lost about 6% since its peak, partially due to the employer contribution until I was laid off in August, and partially because its fixed income component was unusually high at 4.5% and I moved a bunch of money into that component when I left. By comparison, the IRA in which I consolidated a bunch of other bits of employer money ten years ago has lost 40% of its value.

The 401(k) has now proven to be a giant bait-and-switch, which makes me wonder if this was in fact the plan all along -- use the company match as a reason to eliminate defined benefit pensions and then yank the match. But of course, executive pay goes on unabated. Here are some compensation packages for the companies mentioned in the above-quoted article:



It's clear that companies are making a big show of salary caps and base pay cuts for top executives, but you have to dig down if you want to see just how little difference this makes to their overall compensation, while they're cutting the company match to employees who are trying to save for the years after said executives kick them out of the workplace.

I'm very well aware that this is a time of belt-tightening and that everyone is going to have to bite the bullet. And I think most of us are willing to take our share of the hit, especially if it means keeping our jobs. I was willing to take a 30% cut in order to stay in my last job, had it been an option. And to the extent that companies are finding ways to handle cost cuts without cutting headcount, they should be applauded for not dumping yet more people onto the unemployment rolls. But there's an element of good faith that has to be at work here. I'm fortunate in that my employer is at least so far finding ways to reduce costs by cutting unnecessary expenses, without affecting what it sees as its compact with employees. It is not an American-owned company, which may make the difference. But when we see small companies spreading the pain around while large corporations like GM, Motorola, and Eastman Kodak make token gestures on executive base pay while taking advantage of this recession to terminate 401(k) company match programs, the push is still on to create a new plutocracy, with the everyone else scrambling for scraps.
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3 Comments:
Anonymous Anonymous said...
It's all just more pile on. The shitstorm of bad news is so overwhelming that I think people are simply tuning it out.

What always amazes me (because I guess I'm a socialist at heart) is that the very people in an organization who make the most money, also get the most perks that benefit them personally as well. Cars, gas cards, car allowances, expense accounts, stock options, ect.........and that stuff so rarely gets a true examination in terms of how that makes their salary worth so much more because they don't have to pay for the necessities like the workers do. Their company car breaks down and the company pays to fix it. My car breaks down, I pay the bills and possibly lose income because I miss work.
12/22/08, 11:18 AM  
Blogger J said...
I haven't had a match in years.

And it's not right that they pushed 401(k)s on us like the best thing since sliced bread.
12/22/08, 2:06 PM  
Blogger Unknown said...
401k's have certainly struggled of late, but the truth is that pension plans have fared no better. With their relative lack of transparency, it's easier to hide the carnage.
12/23/08, 3:45 AM  
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