I was recently turned on to an article on MarketWatch by a colleague of mine. It was about a study that showed how companies could save money by eliminating the 401k match for their employees. As our readers know, the 401k has been a topic of discussion on our website in the past. We covered the basics about the “free” money, as well as the advantages to younger persons; such as those who are in their twenties and looking to start a retirement fund.
This article by Robert Powell was about a study to be featured in the PlanSponsor magazine sometime this August. The study supposedly provides research to show that if employers add automatic enrollment plans and eliminate their 401k plan matches for their employees, the company can save money without any adverse affects on their employee’s contribution rates. The benefit is that the company will save money while being able to contribute more money to reducing the fees of the 401k, or for other programs to reduce health care costs or for other ways to encourage employees to save who have not started already, rather than helping those that already are.
From An Employee’s Perspective
So from the employee’s perspective, what does this mean? Most twenty year olds are just starting out and would be lucky enough to work for a company that offers a 401k plan with a contribution match program. As noted in our previous article, it’s important to begin a 401k early for a few reasons. First With time on your side your 401k is able to grow for a longer period of time and reap the long-term benefits from the power of compounding interest. Second, it’s “free” money for you from your company, in the sense that they match your contribution. Each company has a different percent they match, so ask your HR representative. The matching contribution can be in some cases upward to 6%. This is more or less a 6% raise in your pay. The only potential “disadvantage” to you is that up to 6% of your income is locked into a 401k, but it depends on how you look at it. To me, that 6% is meager savings in my book and not hard to do without, so it’s a savings advantage.
If companies do look at this study as significant and eliminate the matching contribution they make to your 401k account the effects will be two fold:
However, neither of these points were considered in Powell’s article. Probably because the overall focus of the study was the significance to the company. What I would be curious to find out is how eliminating the 401k contributions came into question. My guess is that companies are looking for ways to eliminate costs due to the recession and somehow found a way to rationalize eliminating their matching contribution. It seems to me that there is a legal loophole that allows companies to substitute the automatic enrollment plan in lieu for the matching contribution, allowing companies to cut costs.
Who Is It Really Helping?
So the question is, who does this 401k match elimination help more in financial terms? Is it the company who no longer contributes to employees 401k plans, who is not required by law to reallocate that money to help the employees such as reducing fees or health care costs? Or is it the employee, who may benefit from the automatic savings plan, but loses money in the long term and has a smaller 401k balance? In the past, companies have eliminated pension plans to cut costs, citing personal savings options and government savings programs… what’s next on the chopping block? Heath insurance?
Conclusion
Powell was right to note that the study is “flawed.” Apparently, researchers examined the experience of one company and extrapolated the results. It was somewhat more of a case study rather than a research paper, which means that the data used was statistically insignificant and may / may not be replicated with the same results. This is not to say that the study was a fluke, but that it could be a start of a larger movement away from the 401k match, which made it noteworthy. The impact of this study is yet to be seen. So there is no need for you to go stomping into your boss’s office on Monday demanding that they keep their 401k plan policies in tact. Studies have yet to be done in terms of the long-term effects of the automatic enrollment plan and the experts that were cited in Powell’s article note that companies have not been quick to move to eliminate their contributions to their employees 401k plans. There are arguments for both sides, but I am of the opinion that the contribution match has to be maintained until more substantial results show otherwise. Who knows? Maybe big things will come of this. Maybe companies and the government alike will realize that forcing people to enroll in a retirement savings plan is merely a short-term solution to a long-term problem. Maybe they’ll realize that the solution merely requires improving financial literacy. Maybe. But probably not.
~K
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