ALL BUSINESS: Companies bringing back 401(k) matches signal bright spot in tough economyBy Rachel Beck, AP
Friday, July 30, 2010
ALL BUSINESS: A bright spot in a tough economy
NEW YORK — FedEx Corp. is reversing one of the uglier corporate trends of the recession: Starting in January, it will restore matching contributions to its employees’ 401(k) plans. For some workers, that means retiring with tens of thousands more dollars socked away.
Hundreds of miles from FedEx headquarters in Memphis, a small hospital that serves a vast, poorer, rural area of Tennessee is doing the same. Starting last Monday, it began chipping in on 401(k)s for the first time since May of last year.
The two businesses are doing the right thing by their employees. There’s a broader message about the economy in this, too, and it’s a good one.
Neither company was obligated to reinstate its 401(k) match now. With one in 10 Americans out of work, employers have their pick of people to hire. They don’t need to offer perks to be competitive.
“In normal times, if you want good employees, you need to offer a match,” says Alicia Munnell, the director of the Center for Retirement Research at Boston College. “These are hardly normal times.”
The 401(k) plans allow employees to save and invest a percentage of their annual salary. Employees can withdraw the funds when they retire, which is when the money is taxed.
Those plans differ from traditional pensions, which guarantee workers a set payout at retirement. In recent years, many companies have done away with pension plans because they are more costly to run and hard to manage. A company directs all the investments on a traditional pension plan, while the onus falls on the individual in a 401(k).
Of those Americans with a retirement plan, 67 percent have only a 401(k), 7 percent have only a traditional pension and 26 percent have both, according to the Employee Benefit Research Institute, a Washington-based nonprofit group.
Companies often offer employees an extra incentive to participate in the 401(k) by matching some of the money that is set aside. Typically, that runs about 3 percent of pay, so long as employees contribute at least twice that.
For instance, someone who makes $60,000 might set aside 10 percent of their annual pay in the 401(k), for a total of $6,000 a year. The company match of 3 percent means another $1,800 a year.
Once the recession hit and profits sank, companies looked for ways to cut costs and raise cash fast. They couldn’t immediately reduce health care costs, because those are planned months in advance. Traditional pension plans also couldn’t be stopped quickly. Even if companies laid off workers, they still had to pay severance.
Suspending the match became an easy alternative. About 10 percent of the nation’s largest companies cut their matches in late 2008 and early 2009. The cuts were more dramatic for smaller businesses: At least a quarter of them stopped paying money toward 401(k)s, according to Byron Beebe, who runs the U.S. retirement practice for benefits consulting firm Hewitt Associates.
Cookeville Regional felt the full force of the recession. Fewer patients came in, and many of those who did couldn’t pay. Many people with insurance couldn’t cover their co-pay. Charitable contributions to the hospital fell at the same time that charity care surged.
“Hospitals had always been thought of as being recession proof, but this recession proved that theory wrong,” says Bernie Mattingly, the medical center’s CEO.
The hospital, which serves the state’s northern middle, began cutting costs early last year. It slashed jobs, instituted a hiring freeze and ordered all department heads to reduce expenses. The 401(k) match was gone, too. It had promised workers a 3 percent match.
Cookeville saved $3 million from those cuts. A third of that came from suspending the 401(k) match.
Now, Mattingly says more patients are visiting the hospital again. There are more babies being delivered and more heart surgeries getting done. The hospital is hiring.
The 401(k) match was reinstated on Monday, the same day that FedEx said it was bringing back its full match next year.
As the recession took hold nearly two years ago, FedEx’s shipping volume tumbled. More people were shipping less, or were switching to slower shipping methods to save money.
The company reduced $3 billion in costs through layoffs, pay cuts for management and other measures like suspending its 401(k) match. At that time, FedEx said half of those cuts would be permanent, and the rest could be restored. The company declined to breakout the cost of the 401(k) match.
“We said as economic conditions improved, the match would come back,” says FedEx spokesman Jess Bunn.
Business is now picking up for the world’s second-largest package delivery company. As a result, FedEx employees who set aside at least 6 percent of their pay will once again get a 3.5 percent match.
“The main reason we did this is that we wanted to reward our work force for the sacrifices that they had to make over the last couple of years,” Bunn says.
In recent months, other companies have also announced plans to restore their matching. Those include Morningstar and the Minnesota Opera. More are expected by year-end, according to a survey by Hewitt Associates.
Restoring a 401(k) match sends a message: We are prospering again. Let’s hope this kind of behavior catches on.
Rachel Beck is the national business columnist for The Associated Press. Write to her at rbeck(at)ap.org
Tags: Financial Planning, New York, North America, Personal Finance, Personal Investing, Personal Spending, Personnel, Recessions And Depressions, Tennessee, United States