GM Won’t Be Alone in Freezing Its 401(k) Match, Experts Predict

Employees aren’t the only ones thinking about suspending their 401(k) contributions as a result of the economic crisis. Many employers may be discussing a similar move with regard to 401(k) matches, experts say.

On Thursday, October 23, General Motors announced it was suspending its 401(k) match as one of many ways the Detroit automaker is trying to cut costs. The company had matched salaried employees’ 401(k) contributions up to 4 percent.

And while General Motors might be an extreme example of how some companies are being battered by the financial crisis, some experts say the automaker won’t be alone in its decision to freeze its 401(k) match.

“A number of companies did this during the bear market in 2001,” said Ted Benna, who is known as the founder of the first 401(k) plan and is COO of Malvern Benefits Corp., a 401(k) plan administrator. “We are in a very nasty situation that isn’t going to get better for some time and a lot of employers are going to be anxiously looking at how to reduce costs.”

In 2001, GM became one of the handful of large employers to freeze its 401(k) match, but the automaker resumed it when business began to pick up.

Even though these moves by employers are temporary, they can still have a substantial effect on employees’ ability to save for retirement, said Alicia Munnell, director of the Center for Retirement Research at Boston College.

“You would think that people would increase their contributions to offset the loss of their match, but that rarely happens,” she said.

This can be particularly difficult for low-income workers who need the employer match to have any kind of retirement nest egg, said Don Stone, president of Plan Sponsor Advisors, a Chicago-based 401(k) consultant.

The good news is that while some companies may suspend their 401(k) matches, it shouldn’t have as much impact on employees’ contribution rates as it has in the past, said Lori Lucas, defined-contribution practice leader at Callan Associates. That’s because more employers have adopted automatic enrollment.

“Typically when employers suspend their match, we see participation decrease, but we may see less of that in this environment,” she said.

Some experts believe few employers will freeze their 401(k) match.

“Companies that have a 401(k) plan as their only retirement savings program are less likely to stop contributing to these plans, because it’s the only thing they are doing,” said Dallas Salisbury, president of the Employee Benefit Research Institute. “And it sends the message to employees that the company is in dire circumstances.”

—Jessica Marquez

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