Suspending 401(k) matches for just one year can save most companies millions of dollars a year, but doing so can severely negatively impact participants' savings rates and long-term retirement outlook, and should be avoided, according to Hewitt Associates.
On average, employers save $1,500 per employee a year by ceasing the match, assuming a match of 50 cents on the dollar for the first 6% contributed. Large companies can save an average of $25 million a year, medium-sized companies $10 million and small companies $2 million.
However, Hewitt notes, "once the match is suspended, employees may reduce their own 401(k) contributions or even stop contributing to their plan entirely. As a result, employees' retirement savings shrink by thousands of dollars due to that one-year suspension."
Thus, a young worker earning $50,000 a year will have $1600 less for retirement just by their employer suspending matches for one year, and if they themselves stop contributing during the year as well, they will have $48,000 less. If withdrawals continued for five years, their retirement savings pool would be $150,000 smaller.
"We believe employers should suspend their match only as a last resort," said Pam Hess, director of retirement research for Hewitt. Instead, Hewitt suggests that employers reduce the match rather than eliminate it temporarily. The consultancy also recommends that employers seek out lower-cost plans.
So far, about 34% of employers have reduced or eliminated their 401(k) matches since January 2008, according to Spectrem Group, and 29% plan to do so over the next 12 months.
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