The Return of 401(k) Matching

The 401(k) match is coming back. Unfortunately, some will be skinnier than they were before.

As the recession took its toll over the past year, about a quarter of all businesses pared costs by reducing or suspending their matching 401(k) programs, says Watson Wyatt, an employee-benefits consulting firm. Now, with a recovery underfoot, companies are increasingly reinstating this beloved perk. In the next six months, 35% of firms that snipped away at their matching programs are planning to bulk them up again, according to a recent Watson Wyatt survey. That’s up from 24% two months ago.

But the 401(k) is not necessarily going back to its former shape, says Bryan Place, a certified financial planner and president of Place Financial Advisors in Manlius, N.Y. In the Watson Wyatt survey, 13% of the companies planning to re-establish the match said they’ll reinstate it at a lower level. Other firms are tinkering with how and when that money gets distributed. Most notably, “companies are moving from a nondiscretionary match to a discretionary match,” says Place. That means some businesses are introducing new rules, such as tying the match to corporate profits.

How might your 401(k) fare? Here’s what you should know.

One of the biggest changes is that some companies are beginning to base the 401(k) match on corporate profits. In the Watson Wyatt survey, 17% of the companies bringing back the match said the size of the new match will vary depending on profits.

From an employer perspective, it’s easier to tell workers they won’t be getting a match because the company didn’t perform well, says Robyn Credico, the national director for defined-contribution consulting at Watson Wyatt. Companies would need to establish – and make known – a benchmark based on certain criteria. If the benchmark is reached, employees get their match.

Another possible scenario: The company starts off with a match of 25 cents per dollar contributed to the plan up to 6% of pay. If the company reaches its stated profit goal, it will up the match to dollar-for-dollar. (The most common formula used by companies is a match of 50 cents on the dollar up to the first 6% of pay, according to the Profit Sharing/401(k) Council of America, an association of companies that provide these plans.)

Other companies are distributing the match money at the end of the year in a lump sum instead of making ongoing contributions. In this case, companies may not be changing the match percentage or amount they’re contributing but are waiting to allocate it until the following year and using that cash flow for other purposes in the meantime, says Place.

There are some clear disadvantages for employees in the profit-based arrangement. One is that workers don’t know what they’re getting as a match or if they’ll get one at all. What’s more, the money won’t be invested during the year, and any potential return from those investments is lost. Also, since the added match money isn’t invested periodically, employees miss out on the benefits of dollar-cost averaging – a strategy that ensures you are investing when prices are low. (For more on this strategy, click here.)

There are also drawbacks to the lump-sum plan. Consider a plan that includes a three-year vesting period, which means that’s the amount of time you must be employed to get the matching contribution. If you leave after one year, you can take your 401(k) plan with you, but you get no matching funds. From an employer perspective, “if you don’t have to match anyone who leaves during the year, that’s money you could spend on other people who are committed to staying,” says Credico.

There’s no real way for employees to know if their company is planning to restore the match contribution. You can ask your human resources department, but they’re not obligated to disclose their intentions, says Place. However, management would probably want workers to know if it plans to make such a move; it’s in their best interest to communicate with employees about benefits, he says.

While firms have felt the need to temporarily shelve or scale back matches for financial reasons, it’s unlikely that a company would decide to do away with its 401(k) plan altogether, says David Wray, president of the Profit Sharing/401(k) Council of America.

“By and large, plan sponsors stayed committed to these programs,” he says.

In fact, employers are enhancing their retirement benefit programs: The number of companies implementing automatic 401(k) enrollment and automatic escalation or rebalancing is increasing, says Wray. “I don’t know of a single plan termination by a company that is viable,” he says.