Companies cut back on 401(k) matches, employee borrowing jumps again
Posted on 21 December 2008
Permanent URL of this article: http://retirementrevised.com/money/companies-cut-back-on-401k-matches-employee-borrowing-jumps-again
More bad news is surfacing on the 401(k) front, with benefits consultant Watson Wyatt reporting that a growing number of employers are cutting back on their matching contributions to 401(k) accounts. A Watson Wyatt survey finds that five percent of companies already have reduced their contributions this year, and another 7 percent expect to make cuts in 2009. Separately, the study finds the number of employees taking loans against their 401(k) accounts is rising.
The cuts in 401(k) contributions are coming from cash-strapped companies facing sharp downturns in revenue as the recession deepens. The timing couldn’t be worse, with retirement savers already facing decimated account balances from this year’s stock market collapse. Taken together, the two trends are raising fresh questions about the nation’s shift away from defined benefit pensions to self-directed accounts, as The New York Times reports today:
To many retirement policy specialists, the lost contributions are one more sign of America’s failure as a society to face up to the graying of the population and the profound economic forces it will unleash.
Traditional pensions are disappearing, and Washington has yet to ensure that Social Security will remain solvent as baby boomers retire and more workers are needed to support each retiree.
The company cutbacks may mean that some employees put less money into their retirement accounts. Even if they do not, the cuts, while temporary, will have a permanent effect by costing many workers years of future compounding on the missed contributions. No one knows how long credit will remain scarce for companies, or whether companies will start making their matching contributions again when credit loosens and business improves.
“We have had a 30-year experiment with requiring workers to be more responsible for saving and investing for their retirement,” said Teresa Ghilarducci, a professor of economics at the New School. “It has been a grand experiment, and it has failed.”
The Watson Wyatt survey reflects two other trends that are very negative for long-term retirement security:
–Shunning equities: Almost six in ten employees (59 percent) have moved their 401(k) or 403(b) investment mix out of equities, compared with just over half (53 percent) in October. That’s almost always a bad move, since it constitutes selling at the low end of the market and reduces the opportunity to benefit when the market recovers.
–Hardship loans: The number of employees taking loans has jumped from 19 percent to 27 percent in the same period. No doubt, the trend reflects the growing stress on household finances, but 401(k) borrowing can have devastating impact on long-term retirement account growth.
