By Jim O’Shaughnessy, AIF®

As employers weigh their options for managing costs through the prolonged effects of the pandemic-driven economic shutdown, one go-to strategy likely to get increasing traction is the suspension or reduction of an employer’s 401(k) match or safe harbor contribution.

Such moves were announced soon after the temporary economic shutdown of local economies by employers that were among the hardest hit. This lag in consumer demand impacted employers in all industries, but some of the hardest hit were in the industries declared “non-essential,” such as travel companies, retailers, hospitality firms and some healthcare interests.

Retirement plans, especially defined contribution plans, typically have a fair number of levers to be pulled to increase or decrease the employer’s cost. One of the biggest expenses for a plan is often the matching contribution – a direct cost that can typically be controlled, depending on the plan design.

Some organizations are holding off on making dramatic changes, but are reserving the suspension or reduction as an option if the economic situation does not improve in a timely manner for their own business plan.

This situation is different from the 2008 financial crisis, but employers today can benefit from lessons learned during that dramatic economic recession. One study found that among employers offering a 401(k) match at the time, 18.5% either altered or suspended them. For some employers, reinstituting the match was not revisited for several years following the downturn as they waited until they felt the economy and their own business had stabilized.

Employers see their 401(k) plans – and the match – as an important plan feature and valued employee benefit. An employer matching contribution can be a very helpful recruiting and retention tool and is not something to be tinkered with lightly. Additionally, many employers welcome the opportunity altruistically to promote saving for retirement among their employees. Reducing or implementing a 401(k) match suspension, however, may be one way to mitigate more extreme measures like hiring freezes, layoffs and decreases in capital expenditures during times of financial stress.

In 2008, many plan sponsors of safe harbor 401(k) plans were unable to reduce or suspend their safe harbor contribution because of legal limitations to interim-year plan amendments. Since then, the government has given additional guidance to safe harbor 401(k) plans that may provide flexibility to make changes under certain conditions, such as periods of economic distress.

For 401(k) plans that offer an employer match, as opposed to a safe harbor contribution, it’s important for the plan sponsor to understand how the match is designed within the plan document. There is an important distinction between discretionary and non-discretionary matches; a discretionary match typically provides more flexibility to increase or decrease the employer matching contribution. If the match is non-discretionary, employers typically can still make interim-year changes, but those changes don’t go into effect until the plan document is amended.

Plan sponsors looking at potential adjustments to their matching contributions (or suspension of safe harbor contributions) may want to consider:

  • Reviewing any employer contribution changes with their service providers to confirm the available options, per their plan document
  • Take into consideration that any change to their 401(k) match must be preceded by a 30-day notice to plan participants
  • Communicate any changes to plan participants clearly, stating the case with transparency, laying out the reasons for the decision, and stating the conditions to reinstitute the match back to its pre-crisis level.
  • Ensure that any change to the employer match (or any employer contribution) is made in conjunction with a comprehensive review of all compensation, rewards and benefits.

Without a doubt, the circumstances we are facing in 2020 are unprecedented. Employers are educating themselves on strategies that create financial flexibility, bridging the gap to when business and economic conditions improve.

HUB Retirement Services provide ongoing guidance on your plan’s structure and management to ensure it meets regulatory compliance guidelines and the interests of your employees.

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