After a 401(k) Match is Cut, Do Workers Stop Saving For Retirement?

A company match to your 401(k) contributions is a valuable incentive to save for retirement. New research confirms that employees are more likely to participate in a 401(k) plan when a match is offered.

An employer contribution of at least 50 cents for each dollar a worker saves up to 6 percent of pay increases employee participation in plans by as much as 9 percentage points, according to an analysis of 7,000 Fidelity retirement plans. Immediate vesting, which means workers get to keep the employer 401(k) contribution as soon as it is deposited, was found to increase worker participation by another 2 percentage points. “This research shows that the very existence of any company match, even a small one, incents employees to participate more in their workplace plans, and those participation rates increase further in plans with more generous match programs,” says Scott David, president of workplace investing for Fidelity Investments. About 30 percent of employees enrolled in their workplace retirement plan deferred exactly the amount necessary to get the full employer match.

The recession, however, is causing many companies to suspend 401(k) matches. Over 90 companies have cut or changed their 401(k) match since October 2008, according to the Pension Rights Center, including FedEx, J. Crew, and Motorola. And a survey of 245 large U.S. employers released last week by human resources consulting firm Watson Wyatt found that 12 percent expect to reduce their 401(k) or 403(b) match this year. “When companies eliminate the match to their workplace savings plans, almost half see a decrease in participation and deferral rates,” says David. He advises companies facing hard times to reduce the company match rather than eliminate it completely. “Then we might be able to keep more workers on the right path in their retirement savings efforts,” David says. But previous research has found that once companies and employees put retirement savings on autopilot, most people are unlikely to halt contributions. John Beshears, David Laibson, and Brigitte Madrian of Harvard University and James Choi of Yale University calculated in 2007 that when a company moves from automatic enrollment in a typically matched 401(k) to no match, participation drops by 5 to 11 percentage points at six months after plan eligibility.

Workers in their 30s and 40s were most enticed by a company match, Fidelity found. Their participation rate was 9 percentage points higher in plans with a match. And 50-something workers were 7 percentage points more likely to save when an employer also contributed. But company contributions had little to no impact on workers in their 60s or in their 20s, the study found.

Tell us, if your 401(k) match is cut, will you stop saving for retirement?