Mercer Warns Against Suspending 401(k) Match

By Warren S. Hersch

April 16, 2009 at 08:00 PM

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A new study cautions companies against scaling back or eliminating their matching contributions to 401(k) and other defined contribution plans.

While such reductions can help businesses weather the deepening recession, the measures could also put employees' retirement plans at risk and harm employee morale, according to Mercer, a unit of Marsh & McLennan Companies Inc., New York.

Mercer's report, titled "Suspending the 401(k) Match – Look Before You Leap," found that 17% of surveyed firms were "likely" or "very likely" to suspend the contribution to their DC plans. During the first 3 months of 2009, more than 80 major employers publicly announced plans to reduce or suspend their contributions.

While a suspension of DC-plan matching contributions may make sense for some financially distressed employers, other businesses should consider more "surgical" efforts, the study suggests. That's because reductions in retirement benefits can significantly undermine employee commitment and morale, it warns.

Bill McClain, a Mercer retirement consultant and the survey's author, observes that while the loss of 1 year's employer contribution won't "have a huge impact" on an employee's retirement benefit, a reduction can weaken benefits already hit hard by declines in equity values. A suspension would also deny employees of the opportunity to buy equities at historically low prices, and those implications need to be weighed against the organization's need to preserve capital., he said. He urged employers to try to identify cost savings that would only minimally affect employees' nest eggs.

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