- Several companies recently announced they are reducing the company match to their 401(k) plans, reacting to the economic shock of the coronavirus pandemic and containment measures
- In the 2008 financial crisis, more than 200 companies cut their contributions
- We think plan sponsors should consider tools that can help them take a strategic approach to managing plan costs and outcomes
Under pressure from the burgeoning economic crisis, several companies have announced plans to reduce or suspend employer contributions to workplace retirement plans.
As the COVID-19 pandemic and measures to contain it weigh on the economy, more firms are eyeing workplace savings plans and other expenses. Many companies are taking a hit to their revenues and need to manage near-term uncertainty. Whether to continue a 401(k) match is part of that planning.
As companies react to the economic shock, advisors can offer strategic ideas to plan sponsors considering changes to their 401(k) plan.
During the 2008–2009 financial crisis, more than 200 companies eliminated their company match.* By late 2011, about 75% of those matching programs were reinstated.
Today, 48.9% of companies with a defined contribution plan offer a matching contribution (Plan Sponsor Council of America, 2018). The average match is 5% of income.
Many regulatory considerations are involved when making changes to plans. Sponsors are likely meeting with their retirement plan committees to explore ways to respond to this national emergency.
Even in this challenging period, plan sponsors should not forget about the goal of successful retirement outcomes for plan participants.
Plan sponsors can fulfill their fiduciary responsibility by following a careful process for research and careful consideration about outcomes.
A review of current plan demographics is a good start. Sponsors need a snapshot of the participant population and emerging trends. Are savers seeking more loans or hardship withdrawals? What issues need attention to support their success?
While there may be a sense of urgency, a timely process does not need to lead to hasty decisions. Plan sponsors do not have to sacrifice expediency to conduct thoughtful analysis.
There is a tool that can help.
Using PlanVisualizerTM, advisors can help plan sponsors think strategically about their 401(k) plans. In a few minutes, the tool analyzes data to measure the impact of changes on plan success and cost.
Success is measured by income replacement. PlanVisualizer can assess whether a plan is on track to meaningfully replace income for a significant number of participants. Four main data points are needed: age, salary, account balance, and individual contribution rate.
By factoring in the matching contribution, we can determine the plan’s success score on a scale of 0 to 100. Plan sponsors can adjust plan design, and the tool will show how each change impacts the plan.
It's easy to consider different options:
- Compare options for reducing a match to different levels. Consider formulas (of different levels) — 75%, 50%, 25%, or even 0% — and see the impact on expenses and on success scores, all in real time.
- Analyze company contribution matching information. Try to dial it to a level that makes sense for all participants.
- See the impact of the match on company expenses. The tool shows the cost and impact on plan outcomes.
Armed with a series of metrics and analysis, plan sponsors and their committees can be proactive and strategic in managing the plan.
Advisors can help
For plan sponsors and their plan committees, the current crisis is an opportunity to make thoughtful decisions.
The goal remains the same: the success of the plan and its participants within the context of the company’s overall resilience. In this challenging environment, advisors can start the conversation by offering options to consider and explaining their potential impact on the success score.
Putnam's PlanVisualizer tool for plan sponsors and advisors shines a light on retirement plan design and participant readiness — at all ages and salary levels.
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*13% of firms with 1,000 or more employees suspended the 401(k) contribution and 5% reduced, (Towers Watson), Pensions & Investments, 2020.
For informational purposes only. Not an investment recommendation.
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