Companies rethink 401(k) plan contributions for employees

Most companies that have suspended contributions to employees' 401(k) plans are expected to reinstate the match when the economy improves, but the match may be significantly different.

About a quarter of companies have either suspended their 401(k) plan match or are considering doing so because of the economic downturn, according to a recent survey by CFO Research Services and Charles Schwab. The list of companies that have suspended matches includes Hewlett-Packard, Sears Holdings, Starbucks and Eastman Kodak.

However, a recent survey by Watson Wyatt found that nearly half of large companies that have reduced or suspended their 401(k) match plan to reinstate it within 12 months. Only 5% of companies said they don't plan to reinstate the match.

But some companies are considering changing the amount of the match, or the way it's calculated, employee benefits analysts say. Possible changes:

•Matches linked to profits. The average company match is 50 cents on the dollar, up to 6% of pay. But a quarter of companies that plan to reinstate their company match said the amount of the new contribution will vary, depending on profits, according to the Watson Wyatt survey. Companies believe this option will give them more flexibility to respond to lean times, says Robyn Credico, national director for Watson Wyatt.

Many small employers already tie their matching contributions to profits, says David Wray, president of the Profit Sharing/401k Council of America.

•Contributions to retiree care. Some companies are considering scaling back their 401(k) match so they can fund health savings accounts or other tax-efficient accounts for retired workers, says Virginia Olson, principal for benefits consultant Towers Perrin. Only 13% of workers are very confident they'll have enough money to pay for health care in retirement, according to the Employee Benefit Research Institute. For employers, Olson says, such accounts could be "a great recruiting tool for midcareer hires."

Large companies can save an average of $25 million a year by eliminating matching 401(k) contributions, according to an analysis by Hewitt Associates. But 96% of executives said a company match is an important feature of their 401(k) plan, according to the CFO Research survey.

Companies that don't offer a match may have a tough time attracting talented employees: "The two benefits that employees will look at when assessing employment opportunities are health benefits and the match," Olson says.