A recent survey of U.S. companies finds that 29 percent have already modified, or currently intend to modify, the matching contribution feature in their 401(k) plans during the 2009 plan year; two-thirds of those respondents (approximately 20 percent of all respondents) report that they will eliminate the match entirely.
"Clearly, the economic downturn is causing many companies to reevaluate their 401(k) plan design carefully, and in many cases, rethink their 401(k) plan strategy," said Gary Gross, a Grant Thornton LLP Compensation and Benefits executive director and co-author of the survey. "The highest anticipated action reported by all respondents is the complete elimination of the match, which will generate the most cash savings for the plan sponsor."
Other survey findings include:
- Employer matching - Almost 87 percent of companies reported that their 401(k) plans provided for matching company contributions prior to 2009.
- 401(k) plan nondiscrimination tests - Approximately 34 percent of companies felt that the reduction or complete elimination of the matching contribution feature would make it less likely that the 401(k) plan nondiscrimination tests (the ADP/ACP tests) for 2009 would be passed; and 38 percent reported that they did not expect any significant changes in the test results between the 2008 and the 2009 plan years. Almost 10 percent of companies indicated that they felt the test results would actually improve during the 2009 plan year (which correlates to the 11 percent of companies that reported that they expected to increase the match during 2009).
- Safe harbor 401(k) plans - Approximately one-third of companies with a matching contribution in their 401(k) plans indicated that they currently have a "safe harbor" 401(k) plan (a plan that is exempt from the 401(k) plan nondiscrimination tests because it provides a minimum level of employer match), and approximately 27 percent of the plan sponsors with a safe harbor plan indicated that they are considering the reduction or complete elimination of the match during the 2009 plan year.
- Automatic enrollment 401(k) plans - Approximately 36 percent of companies with a matching contribution in their 401(k) plans reported that they currently have an "automatic enrollment" plan (a plan that automatically enrolls employees when they are initially eligible to participate and contains a procedure for them to "opt out" of the auto enrollment feature), and approximately 31 percent of plan sponsors with an automatic enrollment plan indicated that they are considering the reduction or complete elimination of the match during the 2009 plan year.
"The survey results also illustrated certain trends by industry and by the revenue levels and work force size of the companies," said Mark Ritter, a Grant Thornton LLP Compensation and Benefits director and co-author of the survey. "We found that companies in the health care and not-for-profit industries were less likely to make changes during 2009, while companies in the technology, retail/trade, and financial services/banking industries were generally more likely to make changes during 2009. Larger employers, whether classified by revenue levels or the size of their work forces, were generally more likely to make changes during 2009."
"Companies are expecting 2009 to continue to be a challenging year for business growth and financial stability," concluded Gross. "The impact on 401(k) plans appears to be greater consideration of lower, and more prudent, spending on matching contributions in order to address cash and profit constraints. The reduction or complete elimination of matching contributions may have an ancillary impact on benefits for key employees due to the potential negative impact on nondiscrimination testing; therefore, any decision affecting matching contributions should consider both the overall employee perception of the employer and its 401(k) plan and the potential consequences on retaining and motivating key high-performing employees."
You can download a full copy of the survey, 401(k) plan benefits: Rethinking plan design for challenging times.
About the Survey
Grant Thornton LLP's Compensation and Benefits practice conducted the survey, 401(k) plan benefits: Rethinking plan design for challenging times, to better understand how the current economic downturn is impacting 401(k) programs. The survey was conducted in April 2009 with 283 Grant Thornton U.S. clients participating. Forty-three percent of the respondents are privately held companies, while almost 36 percent are for-profit, publicly traded companies, and the remaining 21 percent of companies consisted of not-for-profit, governmental, ESOPs, partnerships, LLCs, and others. Sixty-seven percent of companies had revenues below $500 million and 33 percent of respondents above $500 million. The industry sectors with the largest participation include: manufacturing, financial services and banking, not-for-profit, wholesale trade and distribution, technology, retail/trade, construction, and health care/health services.