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Tough times for 401(k)s
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December 20, 2001: 11:32 a.m. ET
To save money in tough times, companies are cutting their 401(k) matches.
By Staff Writer Martine Costello
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NEW YORK (CNN/Money) - Back in the flush days of the bull market, employees at Ford Motor Co. had something of a sweetheart deal.
The company matched up to 6 percent of a person's annual salary in its 401(k) plan for 45,000 non-union workers. For somebody earning $60,000, that added up to about $3,600 a year in tax-deferred contributions that would compound into tens of thousands of dollars over time. The perk helped Ford rank 39th in a MONEY magazine survey of employee benefits at top U.S. companies.
But then the economy soured, and Ford, desperate to cut costs, recently announced it was suspending the match as of Jan. 1.
Ford is among a small but growing number of U.S. firms, like steel maker Bethlehem Steel, hotel chain Wyndham International and Atlanta software maker Radiant Systems, that are cutting matching contributions as the economy continues to struggle.
A cut to 'free money'
Workers at these companies can still contribute to the plans. But they're losing one of corporate America's most generous benefits, what many financial planners call "free money."
Companies typically match 50 cents on the dollar up to 6 percent, for a total of about 3 percent of a person's annual pay.
To understand how lucrative a company match can be, let's say you earn $50,000 a year and save 6 percent of your salary in your 401(k). Assuming a return of 7 percent a year, you'd have $17,252 in five years, according to the Employee Benefit Research Institute, a non-profit Washington group. But if you add in a 3 percent company match, you'd have $25,878.
Over 20 years, your savings would grow to $122,986. Add in the 3 percent company match and you'd have $184,479.
But there's a reason that 401(k) plans are considered profit-sharing plans, said David Wray, president of the Profit Sharing/401(k) Council of America, a non-profit group that represents companies with benefit plans. In 1999, when the economy was roaring, the average annual corporate match was 3.3 percent. In 2000, when the economy began to weaken, the average match dipped to 2.5 percent.
"When times are tough, your matching contributions are going to go down. It's a factor of profitability," Wray said.
Belt-tightening on Wall Street
At Ford (F: down $0.04 to $15.29, Research, Estimates), the company hopes to restore the benefit as soon as conditions improve, said Ann Gattari, a spokeswoman. No date has been set. The company's pension was not affected by the change. Union employees were also not affected.
The big U.S. automakers have been struggling with lower sales since the Sept. 11 terrorist attacks, and Ford recently slashed its fourth-quarter outlook.
"It's an easy thing to cut when a company is trying to reduce costs," Gattari said. Ford cut the match once before, during the recession of 1991. It partially restored the benefit in 1992 and fully restored it by 1994, she said.
Bethlehem Steel (BS: down $0.01 to $0.51, Research, Estimates), which filed for Ch. 11 bankruptcy protection in the spring, cut its 4 percent match for 3,000 non-union employees as of July 1, said spokeswoman Bette Kovach. The steel maker also cut the benefit once in the past, in 1983, and restored it in 1986.
"We know employees value the company match, and it's been a mainstay of our program, but we needed to look at all ways to lower costs," Kovach said.
While bigger companies are feeling the pinch, smaller firms may find it even tougher to continue to match contributions, said Rich Zito, a certified financial planner in New York.
"When you're a smaller company, the match is a huge expense," Zito said. He's seen cases where smaller companies cut or lower the match, or make it a tiered system where you get a higher match the longer you've been an employee. Because of confidentiality, he couldn't give any examples.
Radiant Systems (RADS: down $0.02 to $9.57, Research, Estimates), a small firm in Atlanta, was looking for a way to cut back without affecting productivity. Ultimately, Radiant is suspending its match to about 700 employees, a move that will save $750,000 a year, according to John Heyman, chief financial officer. In addition, top executives are going without pay for 12 months, and 60 senior employees took "substantial" pay cuts as part of the belt-tightening to get through the economic downturn.
"We're being more cautious in this economic environment," Heyman said. The company hopes to restore the benefit at some point, he said.
What can you do?
The tax law approved in June raised the maximum annual savings limit in 2002 to $11,000, and the number will increase to a maximum of $15,000 by 2006. If your company changes its policy, it's even more important to save as much as you can, ideally the maximum allowed under the law.
"401(k)s are still excellent savings vehicles...you're just not getting the extra bonus of free money," said Tom Grzymala, a certified financial planner from Alexandria, Va.
Don't be afraid to ask your company a lot of questions. Find out about your company match, and when they plan to reinstate the benefit.
There can be a "fixed" company match that's written into a 401(k) plan, as well as a something called a "variable" component that will change depending on the company's profitability or your individual job performance. Some plans that are more generous may have both a fixed and variable match, while other plans might not have either.
You should also keep in mind that cutting the match is a first step companies take when profits go down. So you might want to brace yourself for tougher times.
"It's a harbinger that things are not good right now and management thinks things could get worse," Grzymala said. But with unemployment at its highest rate in six years, it doesn't hurt to be thankful that you have a job at all, he said.
"You still have a job, so be grateful." 
* Disclaimer
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