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Game, Set, Match
A tough economy is affecting employer contributions
to 401(k)s: We take a closer look at how companies are
implementing changes
12
JO U RN EY Fall 2009
A Trio of Case Studies
How three different companies are handling difficult DC plan decisions
Company A
Company B
Company C
Type of
Business
Mid-sized supplier to
automotive industry
Large Midwest-based
manufacturing firm
Large manufacturer with
nation-wide presence
Catalyst for
Change
Negative macro-economic impact;
Industry-wide turmoil; Companyspecific restructuring; Effort to
avoid layoffs
Negative macro-economic impact;
Corporate restructuring resulting
in pay cuts, mandatory furloughs
and layoffs
Negative macro-economic impact;
Corporate restructuring resulting
in layoffs
Solution
Considered
Elimination of 401(k) match
Elimination of 401(k) match
Suspend 401(k) match for 1Q09
Solution
Implemented
Elimination of 401(k) match as of
January 2009
Elimination of 401(k) match as of
January 2009
Suspend 401(k) match as of
January 2009
Implementation
Period
At least through 2012
At least through 2012
At least through 2012
S
ince the beginning of fourth quarter 2008, retirement
plan sponsors and their participants alike have witnessed unprecedented levels of market volatility, pressure on corporate earnings, belt-tightening initiatives and
overall anxiety about what the future holds for the economy
and their companies. In this uncertainty-plagued environment, many DC plan sponsors are wrestling with tough decisions that may directly impact plan design. The question that
looms largest: Whether or not to cut the company match to
DC benefit plans and, if so, by how much?
Toward the end of second quarter 2009, J.P. Morgan conducted an internal survey of large DC clients to gauge their
sentiment about DC plan-centered cost-cutting efforts. The
results indicated that about 15% of respondents (or 30 firms)
had actually made changes to their company’s matching
contributions. That was down from the 25% of respondents
polled in February who had indicated that they planned to
do so. Yet the 25% figure seems closer to industry averages.
About a quarter of companies either suspended their 401(k)
plan match or plan to do so because of the economic downturn, according to a CFO Research Services survey released
June 22. However, a Watson Wyatt survey, also released
June 22, found that nearly half of large companies that
reduced or suspended their 401(k) match plan to reinstate
it within 12 months. Only 5% of companies said they don’t
plan to reinstate the match.
Of course, broadly speaking, “company contributions” can
encompass any type of sponsor contribution made on behalf
of plan participants (e.g., profit sharing, matching, discretionary employer contributions). Even so, changes to DC plans
generally fall into four categories: match reduction, match
suspension, match elimination or modification to the discretionary formula funding approach (e.g., shifts from funding
with payroll to evaluating funding after the end of the year).
To provide some insight into how different companies are
handling difficult DC plan decisions, a trio of case studies are
highlighted in the table on P.14 (also see “A Closer Look” for
more detailed case study). The examples provide a window
into how plan sponsor peers are adapting to a much tougher
operating environment in which cost-cutting is the norm
rather than an exception.
Each of these case studies shows how companies
are grappling with the uprecedented economic and financial turmoil that has impacted their balance sheets, and
J.P. Morgan Retirement Plan Services
J O U R NEY
13
the monthly statements of employee participants
in their 401 (k) plans. It’s important to note that not
all—or even most—plan sponsors have cut or suspended their company match. That seems to be a
last resort for the most cash-starved firms. What’s
more, even those firms which have done so seem
intent on reinstating the match as soon as warranted
by economic conditions. For the majority of companies
which have retained their matching contribution, the
financial market turmoil may present a timely juncture
to consider new ways of encouraging more widespread
participation in their DC plans as a way to retain and
motivate employees. Indeed, with bread winners tightening their belts and saving more of their paychecks,
the newly frugal mentality could present plan sponsors with an opportunity to engage employees in a
dialogue about increasing 401(k) deferral rates.
Just seven months after switching to a
discretionary 401(k) match, Starbucks
announced on July 27 that it will,
in fact, fully fund its contribution
this year. The coffee store chain had
said that as of Jan 1, it would make a
decision “at the end of the calendar
year” as to whether it would provide
matching funds to its employees’
Future Roast
401(k) Savings Plan,
depending
on its
business
performance.
On July 22,
Starbucks
posted a
S tar
better-thanbucks Extends
expected
third quarter
profit of
$151.5 million,
compared to a
$6.7 million loss
a year earlier.
14
JO U RN EY Fall 2009
Every so often, J.P. Morgan Retirement Plan Services comes across
an inspiring story worth sharing with a broader audience. In this
case, it involves American Electric Power Co., the largest U.S. producer of coal-fueled electricity. The Columbus, Ohio-based company
stands out for having stayed the course with its long-term employee
benefits strategy amid a challenging economic environment. AEP
recently upgraded its DC plan by adopting a safe harbor set-up
under the Qualified Automatic Contribution Arrangement (QACA)
available through the Pension Protection Act. That comes in addition to a robust pension plan and competitive health programs for
both active and retired employees. These three programs comprise
the core of AEP’s benefits package, which is aligned closely with its
recruitment and retention goals.
The move to institute a QACA safe harbor came out of a review
process that AEP initiated in early 2008. The key objectives of that
exercise included:
> Employee participation as close to
100% as possible
> A tiered match (with a 100% match at
the base percent to encourage participants to contribute)
> Simplification of compliance testing
With the economic downturn in full swing by the fall of 2008,
AEP considered reducing its 401(k) matching contribution, but ultimately decided to keep the match intact. “Senior management dismissed the idea of reducing the company match fairly quickly,” says
Curt Cooper, Director of Employee Benefits at AEP. “We recognized
early on that the match provides a significant, ongoing incentive for
employees to participate in the plan and ultimately helps to ensure
they can enjoy their retirement years. It also acts as an important
retention and engagement tool for our work force.”
AEP’s QACA, which became effective as of January 1, 2009, incorporates a retroactive auto-enrollment for its employees. Despite
the short-term financial impact to the company’s balance sheet,
retroactive auto enrollment brought 800 employees into the plan.
The match formula was tiered at 100% on the first 1% of employee
gross income earmarked for their 401(k)s and 70% on the next 5%.
What’s more, 100% of the company’s matching contribution vests
immediately.
AEP has developed a monthly scorecard that allows its benefits
department to monitor participant activity in the plan and report
aggregate results to senior management.
As a result of these efforts, AEP says that employee participation in the plan has remained steady at 92% notwithstanding the
recent market turmoil (only 1% of auto-enrolled participants have
opted out so far). In addition, the company reports that its employees’ changes to their contribution rates have been minimal. “We are
extremely pleased with these results,” says AEP’s Cooper. “We are
meeting our participant-focused objectives, including delivering on
our long-term strategy to encourage retirement savings.”