Will 401(k)s Wither Without Employer Match?

This recession has taken so much from people.

Jobs have disappeared in numbers we haven't seen in decades. Homes have been lost. Credit lines have been reduced or withdrawn. And, of course, retirement accounts have been pummeled. On that last point, some people have wondered whether it's worth still contributing to a 401(k) -- not just because their portfolios have lost so much, but because their employer no longer matches their contributions.

The downturn has caused many companies to take off the table the money they used to give employees as an incentive to save for retirement. Yet the match is seen as a perk that people have come to rely on and a benefit that personnel experts encourage folks to take advantage of.

Recession-battered companies are cutting the matches to save money. Because many of these same companies no longer provide traditional pension plans, cutting or suspending the retirement plan matches hits hard.

Yet even without a match, it's worth saving for your retirement. Who knows what's going to happen to Social Security, considering the fiscal condition of the federal government? That's why I'm particularly concerned that the elimination or reduction of the 401(k) match, coupled with market losses, may cause many lower-wage workers to greatly reduce their participation or stop contributing all together.

In April, the accounting firm Grant Thornton conducted a survey of 283 U.S. companies to gauge how the downturn is affecting the matching contribution feature. It found that almost 47 percent of the companies that automatically enroll employees in a retirement plan thought that a reduction or elimination of the matching contribution feature would lead to more participants opting out.

Almost 87 percent of companies reported that their 401(k) plans provided for matching company contributions. About 29 percent of companies have cut the match or intend to reduce it for this year. Two-thirds of the companies that plan on making changes to their 401(k) match said they would eliminate it; 22 percent said they intended to reduce it. The remaining 11 percent reported that they expected to increase their match.

What's disturbing is that Grant Thornton found that employers are cutting the match even though they know it could result in failing a key federal test on fairness.

Federal rules require that 401(k) plans must comply with annual nondiscrimination testing that can restrict contributions for highly compensated employees. The rule is intended to prevent companies giving all the good perks to its top earners.

Nevertheless, one-third of the companies in the survey said the reduction or elimination of the matching contribution feature would make it less likely that they would pass the federal nondiscrimination test.

In research it released earlier this year, Fidelity Investments found that, on average, when a company offers a match of at least 50 percent on every dollar of participants' contributions, it increases worker participation in plans by as much as 9 percent. Adding immediate vesting, which provides employees full entitlement to all plan contributions with no waiting period, was found to increase worker participation by another 2 percent.

When companies eliminate the match, almost half see a decrease in participation and deferral rates, Scott B. David, Fidelity's president of workplace investing, said when the survey was released.