Q. My company is considering suspending the employer 401(k) matching plan. Our sales are down and it has become difficult to make the matching contributions. Ending them just seems to be a no-brainer.
But is this a wise move? And how easy is it to do?
A. It’s easy to see why your company is considering this move. Often it’s a way to cut 2% to 3% from payroll costs in one fell swoop. And some employees prefer a cut in matching contributions to pink slips for some of their co-workers.
It’s easy to figure out how much your company will save by suspending its match. Simply look at your payroll or ask your payroll professional how much your company contributed last month.
You may be able to stop the match without advance notice. However, if your company operates under IRS “safe harbor” rules, you’ll need to give employees at least 30 days’ notice of the change. Check with your benefits plan representative, as requirements vary widely. Even without a “safe harbor” plan, it’s best to give employees at least a month’s notice. And, if you have employees in a bargaining unit, you likely won’t be able to make the change under your current contract.
If your plan has a “fixed” match formula, it will need to be amended, and the employees must be informed of the amendment through a new summary plan description (SPD) or a summary of material modifications (SMM). If, however, the plan has a “discretionary” match formula, there’s no need to either amend the plan document or provide the SPD or SMM.
Before halting the match, though, think it over carefully. Once the match is suspended, employees may decide to reduce their own 401(k) contributions or stop contributing to their plans entirely. As a result, an employee’s retirement savings can shrink significantly due to even just a one-year suspension, especially for younger workers who still have many years until retirement for their contributions to grow.
And at a time when many people are more worried than ever about having enough money for retirement, eliminating your 401(k) matches could be a particularly hard blow for your employees. The potential result? Lower morale and lower productivity. Some employees may even leave for a competitor that still offers matching contributions.
As an alternative, consider decreasing your contribution rather than eliminating it — or finding another cost-saving measure. This may lessen the hurt, and also create goodwill among the employees and management.