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by Martha M. Hamilton, AARP Bulletin, October 22, 2009
If you work at a company where the retirement plan matching contributions have been suspended, you may be in for some good news soon.
A handful of companies already have reinstated matching contributions—extra money added to your account based on the amount you contributed—and others are contemplating doing so next year.
“We’ve had a lot of questions from companies wondering whether other companies are reinstating their match,” says Bill McClain of the business consulting firm Mercer. “Based on that, I think a lot of companies are thinking about what to do for 2010.”
Companies that already have reinstated the match include the San Diego Union-Tribune and the semiconductor equipment maker Kulicke & Soffa Industries in Fort Washington, Pa.
More seem to be following suit. According to an August survey of employers by Watson Wyatt Worldwide, 24 percent of companies that had cut their matching contributions were planning to increase them within the next six months. The consulting firm had reported that 22 percent of the 175 large employers they surveyed had cut the match.
McClain said that some companies are budgeting to restore matches while not making public any decision. “They’re holding off on announcing it to see how the economy performs,” he says.
It was bad enough to watch your retirement savings tank with the market over the past year, but at least the recent upturn has erased some of that pain. And it appears that most participants in retirement savings plans sat tight, instead of taking money out of the market or stopping or decreasing their own contributions.
According to a 33-country survey of retirement plans released by Mercer in October, “in the U.S. the trend has been toward inaction by the majority of employees.” That’s a good thing, because staying in the market means being in position to benefit from the recent upswing and make some of that money up.
If you work at one of those companies that suspended the match, you have that shortfall to make up for as well. [See “For Want of a Match” sidebar at left.]
Of the companies that did suspend matching contributions, most were smaller companies, according to McClain. But there were some notable big companies that suspended the employer match, too, including the auto companies we used to refer to as the Big Three—General Motors, Chrysler and Ford. Also suspending were Sears, FedEx, UPS, Sprint and Motorola. So did some nonprofits, including AARP. Still other companies announced they were shifting from a guaranteed match to a discretionary match based on the company’s performance.
New ideas in retirement savings
Many companies are looking for ways to make retirement savings plans work better. The main approach is automating the ways in which they work.
• Automatic enrollment: When savings plans began to supplant traditional pensions, most required employees to sign up for retirement plans if they wanted to participate, and many workers never got around to it. Now companies are increasingly adopting a new model—automatic-enrollment plans—that require the employee to take action to opt out of the savings plan. According to the Profit Sharing/401(k) Council of America, 40 percent of all U.S. plans and more than half of large plans currently use automatic enrollment.
• Automatic increases: Most companies with automatic enrollment start out with the worker’s contribution at 3 percent of pay. A third of companies surveyed by Mercer automatically increase the contributions by 1 percent a year to the maximum savings rate set in the plan, or to the level that maximizes the company match.
• Automatic rebalancing: A fifth of the companies in the same survey automatically rebalance participants’ portfolios to reflect their original exposure to risk. For instance, if a participant originally chose to put 60 percent of his savings in stocks and 40 percent in safer investments such as bonds, over time that ratio might change if the stocks rose and their dividends were reinvested in still more stock. Rebalancing would help the portfolio return to the original ratio and a lower exposure to risk.
• New investment options: Companies are also looking at providing new investment options that could lead to a healthier retirement, including Roth savings plans, which allow savings to grow tax-free.
People who qualify for a Roth plan invest money on which they have paid taxes, but any earnings over the years are tax-free—the opposite of how a traditional savings plan works.
Employers also are offering “target date” and “life cycle” plans that reduce participants’ exposure to risk as they approach retirement. And many are also looking at providing for automatic investment in annuities that provide a lifelong stream of income in retirement.
Room for improvement
There’s certainly room for improvement in retirement savings plans. Many companies don’t offer them at all, for starters. And many workers don’t contribute enough to provide for a secure retirement.
According to the Employee Benefit Research Institute, which has been surveying 401(k) participants along with the Investment Company Institute since 1996, at the end of 2008 half those workers with savings plans had balances of less than $43,700. Spread that over 20 or 30 years of retirement, and it doesn’t amount to much.
For many years I thought that traditional pensions might make a comeback as demographics drove down the size of the workforce and employers were forced to compete for talent. But now, with unemployment so high, that seems unlikely. As a result, for better or worse, we are going to be depending on retirement savings (and Social Security) for our future income.
So, if you work where there is a savings plan and haven’t signed up, do it now, even if you think you can’t afford the money out of your paycheck. Once it is automatically deducted, you won’t miss it. Trust me. I did this even when I was going through a very financially tough period after a divorce. I cut back in other areas and sold clothes at a consignment shop, but I continued saving for retirement. And I’m glad now.
Martha M. Hamilton writes a regular column for Bulletin Today on retirement and financial issues.
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