The Future of 401(k) Plans

Will employers that currently match employee contributions to 401(k) plans be a thing of the past? Some say yes. Some say no. Given the current economic climate and the fact that health care costs are rising, one study conducted by Yale and Harvard says that the money companies use to match contributions could be better used elsewhere and save companies money.

According to my colleague at Dow Jones and my guest this morning on Money for Breakfast, Robert Powell, researchers are saying companies would be better off using the money they now put toward plan contributions, and instead use it to lower health care costs, minimize 401(k) plan fees and help pay for employee benefits. This, at a time, when employee benefits are rising, companies are cutting costs, wages and headcount. Just last week General Motors announced huge cost cutting efforts and changes to how they compensate their employees.  

Will this happen across the board? Not so, according to another survey conducted by Hewitt Associates in Robert’s column entitled “Eliminating 401(k) Matches Might Actually Be a Savings Boon”  but is discouraging in light of the current economic environment. Companies need their employers to participate in these plans as many of them are either compensated in their companies stock or have bought into their pension plans. The companies use the shareholder or employee buy-in for things like buy backs which at the end of the day help the stock but in this environment the first thing companies look to do is cut benefits.  

Is this the beginning of this story? My guess is yes. Two problems as I see it. One, wage deflation. Will companies who need to cut costs cut wages and in turn benefits or the other way around? With inflation at record levels that means not enough buying power. Two, more and more retirees and home owners at risk of default are borrowing from their 401k’s to get out of debt or because they didn’t plan for a downturn in the economy. At the end of the day, none of this is good and lends credence to those who say we are not contributing or preparing as aggressively for retirement as we should be. Imagine if your company now stops offering a plan to match your contributions. Keep an eye on that. If you’re not putting money toward your 401k and you company offers a matching plan, invest in it. It’s FREE MONEY. But, don’t make the mistake that too many have made by investing it all in your companies stock. DIVERSIFY, DIVERSIFY, DIVERSIFY!