Employers plan to cut more retirement perks amid recession

The number of employers offering, and planning to offer, retirement perks to new employees has fell in response to the recession, according to a recent survey by Hewitt Associates.

Instead of offering premium retirement features, including automatic enrollment and company matches, the survey found that employers are more focused on offering lower-cost strategies, such as automatic rebalancing and target-date funds.

Hewitt’s annual survey of about 150 mid- to large-sized employers revealed that half (51%) currently offer automatic enrollment, up from 44% in 2008.

Among the companies that don’t currently offer automatic enrollment, just 25% are likely to add it for new hires, down from 57% in 2008.

The top reason for not offering automatic enrollment is because of the high cost of the employer match. According to the survey, only 2% of employers have cut or temporarily suspended 401(k) company matches since the recession began, about 5% plan to do the same this year.

Depending on where our economy stands in the next 12 to 18 months, Hewitt predicts that about 10% of companies will also cut or suspend 401(k) matches.

Has the economy forced your business to cut back on employee retirement perks? What lower-cost strategies are you using instead?

Employers plan to cut more retirement perks amid recession

The incredible shrinking employee 401(k)

401(k)s are performing worse than they have in more than five years.

In a recent Workforce article, the Mercer consulting firm reported losses in every equity category posting during the first quarter.

The median large-cap growth fund tracked by Mercer fell 11.6 percent during the first quarter. Large-cap core and large-cap value funds dropped by more than 9 percent.

The good news is that the second quarter is off to a stronger start. The S&P 500 posted a 4.9 percent gain for the month of April, ending a streak of five consecutive negative months.

Not only are employee 401(k)s shrinking, but one in four employees will withdraw funds from their retirement account early, according to a May SHRM article.

The experts advise that employees only borrow against their 401(k)s when it is their absolute last resort. HR managers should educate employees on the impact borrowing against retirement funds will have on the long-term growth of their money, and also on the penalties employees may face if loans are not paid back.

A 2008 Wall Street Journal Online with Harris Interactive Personal Finance poll found that:

• About 25% of American adults have withdrawn retirement funds early, citing the most common reason as a family member losing a job and the cost of a down payment on a home.
• Almost 33% of those who have withdrawn funds early from retirement accounts cannot pay them back
• People between 45 and 54 are more likely to be unable to payback retirement withdrawals.

Read the full SHRM article for more detailed information on the poll.

Laurie Ruettimann, former HR professional and outspoken blogger, shared a story yesterday about a company she once worked for who allowed employees to take loans against their retirement investments during a period of reconstruction. During the reconstruction, many employees lost their jobs and were forced to pay back their 401(k) loans in full within the 90 day period after termination date, or the loan would be treated like a cash withdrawal.

Ruettimann’s advice:
1. Don’t take a loan against your 401(k).
2. Don’t do it.
3. Just don’t.

The incredible shrinking employee 401(k)

Employee 401(k) loans on the rise

Increasingly more employees are damaging their financial futures by borrowing against their 401(k) plans. Retirement plan participants are taking out loans on their investments at an accelerated rate, as reported in Workforce Management.

Researchers from Boston College expect that the trend will continue and companies should expect to see more employee 401(k) loans this year.

With our country’s credit crisis and poor housing market, if they need the money, why shouldn’t employees take out a loan on their 401(k)?

The author of the Retirement Plan Blog explains why it’s a bad idea:

• They’re losing the earnings on their accounts since there’s less money to invest.
• The tax shelter advantage is lost since the loan is paid back with after-tax dollars.
• The interest paid on the loan is not deductible since it’s considered regular consumer debt.
• If the participant terminates employment prior to paying off the loan, the loan has to be repaid or it’s considered a taxable distribution with a 10% penalty tax if the participant is under age 59 1/2.

Some employees don’t even have the benefit of taking out a loan against their 401(k). Less than 50 percent of the workforce, ages 25 to 64, has any kind of defined benefit or defined contribution plan, according to the director of the Boston College Center for Retirement Research.

According to the research, of those eligible to participate in defined contribution plans:

• 89% do not contribute the maximum
• 20% to 25% do not contribute at all
• 45% do not rollover their investment when changing jobs

In companies that have automatic 401(k) enrollment, 86 percent of employees participate.

Automatic enrollment may not always be enough. Participants generally fail to increase the amount of their default contributions over time. According to the research, 61 percent do not increase their contributions above the default.

Educate your employees on why they should contribute to the company's 401(k) plan and coach them on how to effectively manage their money.

Employee 401(k) loans on the rise

401(k) Education: Taking plays from the NFL

Three weeks after joining the NFL, young recruits are sent for training off the football field and in the classroom. Each year, over 100 NFL players participate in college-level programs on various business topics. The programs are designed to teach players how to manage their money so they can still live comfortably once their football career is over.

“It's a way for the league to help ensure financial stability for these players beyond their primes,” according to a recent Forbes article.

While employees at corporations across the US generally make a small fraction of the money a NFL player would, it’s just as important they know what to do with their money. Automatic enrollment in the company’s 401(k) plan isn’t enough anymore.

In 2007, 34 percent of large employers offered automatic 401(k) enrollment. The average employee contributed 4.5 percent of their salary to a plan, which may not be enough for a comfortable retirement.

Some of your employees may need a little extra coaching when it comes to a retirement plan. Strongly encourage your employees to contact the financial organization that handles your plan for advice. If you’re up to the challenge, hold your own workshops during to educate employees on the best way to manage their money.

Don’t just assume your employees know exactly what to do with their 401(k). Many employees would be surprised to know how much more they would retire with if they contributed a slightly higher salary percentage than leaving it at the automatic level. You signed them up for the program, now show them how to use it.

Take a lesson from the NFL playbook and educate your employees on how successfully managing their 401(k) will score a touchdown when their prime is over.

401(k) Education: Taking plays from the NFL