Tip of the Day: 'Look before you leap'

As the recession drags on, more employers are reducing or eliminating their matching 401(k) contributions. A new report from Mercer, "Suspending the 401(k) match – Look before you leap," cautions employers to have a full understanding of the implications and potential pitfalls of taking this step.

“Distressed organizations may feel they lack sufficient time or resources to carefully consider the impact of contribution reductions or to evaluate alternative approaches. But the effort invested up front could save considerable time and expense later in dealing with unintended consequences,” says Bill McClain, Mercer retirement consultant.

“While the loss of one year’s employer contribution won’t have a huge impact on an employee’s retirement benefit, it could represent yet another incremental loss to an already-weakened benefit,” McClain observes. “Suspending contributions also results in a lost opportunity to purchase equities at historically low prices. These implications need to be weighed against the organization’s need to preserve capital.”

Companies should not lose sight of their longer-term business objectives, Mercer warns. “Many organizations will be better off identifying cost saving that will have only a minimal impact on those groups of employees that will be the most critical to helping them move forward once the economy improves.”

In addition, the regulatory implications of a match reduction or suspension can vary greatly from plan to plan. Employers maintaining an IRS safe harbor design are subject to specific rules or even restrictions on suspending or reducing contributions during the plan year. Other plan designs may offer more flexibility in terms of changing employer contributions, but even these plans must satisfy various regulatory requirements.

In particular, employers need to understand whether a plan amendment is required and whether that amendment raises any anti-cutback issues.

Plan sponsors should determine whether language in past employee communications could be interpreted as a promise to provide ongoing contributions. Organizations with collectively bargained or other employment agreements in place may be prevented from making company-wide changes to DC contributions.