What to Consider Before Cutting the Match

Advisers can help plan sponsors determine whether cutting the employer match contribution is necessary—and also help communicate changes to participants.

In a recent PLANSPONSOR Plugged In Webcast, experts suggested that before cutting the match, plans can consider other cost-cutting strategies, such as renegotiating fees with the provider. “I think you can go to your service provider…and improve your cost-benefit equation,” said Fred Reish, partner at Reish, Luftman, Reicher, & Cohen. He noted that service providers operating with asset-based fees right now are seeing their revenues go down and might be open to negotiation.

Mark A. Davis, vice president and financial adviser for CAPTRUST Financial Advisors in Westlake Village, California, added that money could be found in the fund menu if there is an unequal level of cost-sharing because some funds have revenue-sharing components and others don’t. Placing wrap fees on funds that are not revenue-sharing is “an easy way to pick up money for the plan…and not only is it a cost issue, but it really is a fairness issue as well, so you kill two birds with one stone,” he said.

But if cost-cutting strategies don’t work and suspending the match is determined to be the best option, plan sponsors need to follow the plan document to find the best way to go about it. Davis also noted the importance of finding legal help: “Don’t try this stuff at home. If you’re going to make this kind of move, find an ERISA attorney.”

Reish noted that now is the time to leverage the provider and adviser. He said that the adviser and provider are critical to helping sponsors communicate to participants, as they are educated and trained to talk about these kind of issues. Reish said that even though the adviser is doing “more work for less pay,” the adviser who picks up the phone to the sponsor and says “what can I do for you now?” has a friend for life. Davis concurred: “When you show up on the bad days is when you earn your stripes….Showing up in October 2007 was easy; showing up now is a challenge.”

Davis also said he has noticed that clients are more aware that vendors might be benefiting from asset-based fees, and therefore have an interest in keeping the match. He said in 2001 and 2002—the last period when a notable number of plans considered suspending match contributions—his clients did not question vendors as much. “I’ve had more than one client tell me they don’t trust the advice they’re getting from the vendor,” he said.

Keeping Participation Up

The truth is that a match deferral can affect plan participation rates. “Having a match does in fact have an impact on participation rates, and when you cut back on it, you shouldn’t be surprised to see some declines in a workplace deferral rate,” said PLANSPONSOR Editor-in-Chief Nevin Adams. He cited a Fidelity Investments study that found that having a match helps participation rates (see “401(k) Match, Auto-Enrollment Key Participation Drivers“).

Advisers can help educate participants to stay in the plan. Davis noted that many employees might be talking around the water cooler about how the stock market is doing badly and they need to get out of it. In reality, many investors are benefiting from the dollar-cost averaging, and will making money 10 to 15 years down the road. Advisers need to be the ones to tell employees they are not stupid for staying in the market, and not to get “whiplashed by the sentiment at the water cooler,” he said.

Is Everybody Doing It?

Match suspensions are all over the headlines, but how prevalent are they? Adams noted that the majority of plan sponsors are not cutting their match, evidenced by industry studies (see “Most Employers Don’t Plan to Reduce Contributions” and “73% of DC Sponsors Plan No 2009 Match Changes“). “You aren’t going to see a headline that says, “No one cut their match today,” he said, and that’s why news organizations such as PLANSPONSOR and PLANADVISER cover match suspensions (see “IMHO: ‘Passing’ on the Ammunition“) The reality is that every day, there’s news about a few plans cutting their match. “You can’t stick your head in the sand and pretend like it’s not going on,” Adams said.

However, Adams noted the more unreported story that some plan sponsors are increasing their match. A recent reader survey by PLANSPONSOR found that 6% of plans have upped their match (see “SURVEY SAYS – Changed Your Mind About the Match?“). A third of those increases are part of a benefit restructuring (such as freezing a defined benefit plan), but the majority are not. Davis said he has some clients interested in increasing the match as well.

Reish mentioned that match suspensions are hardly the only cost-cutting measures employers are taking right now. There is an overall pressure to reduce expenses, including in the benefits arena. Right now, he said, clients are asking him “what can we do?” Reish said he senses that plan sponsors want to be prepared in case cutting the match is necessary.