With the country in a recession, many organizations are looking for ways to save money, including reducing or suspending contributions to company 401(k) plans. While suspending a matching contribution is a relatively easy and immediate way for a company to save money, it’s important to understand the potential issues around taking this action.
Looking over an employee’s working lifetime, the loss of one year’s employer contribution should not have a significant impact on the employee’s ultimate retirement benefit. However, the action may represent yet another incremental loss to a plan already weakened by a history of low participation rates, inconsistent investment behavior, and the recent market decline. In addition, suspending contributions may, in hindsight, prove to have been a lost opportunity to invest at historically low prices. These implications must be weighed against the company’s need to cut costs.
Define the Details
When suspending matching contributions, regulatory considerations vary according to plan design. Employers who maintain an IRS safe-harbor design are subject to specific rules and restrictions when it comes to suspending or reducing contributions during the plan year.
It is important for you to confirm if your plan requires formal amendments and whether the amendment raises any anti-cutback issues.
You might also want to review past employee communications to determine if any language could be interpreted as a promise to provide ongoing contributions. Employers with collective bargained or other employment agreements may also be prevented from making unilateral changes. In certain instances, reducing or suspending employer contributions could also affect nondiscrimination requirements. Even if a revised plan passes the nondiscrimination tests, employers should still consider whether the timing or nature of the change favors higher-paid employees.
If, after thoughtful consideration, you decide on a reduction of benefits, notify your employees so that you provide sufficient opportunity for them to change their deferral elections before the benefit changes take effect. If your plan offers auto-enrollment, review this feature for any affected matching contributions and update the appropriate materials.
Mike Brown is a partner and retirement plan consultant with ClearPoint Financial, in Seattle; www.clearpoint401k.com. Securities offered through NRP Financial. Member FINRA/SIPC. Advisory services provided by NRP Advisors.