Why Did Some Employers Suspend Their 401(k) Match?

Alicia Munnell and Laura Quinby

Issues in Brief from Center for Retirement Research

Abstract: The employer match of employee contributions is an important characteristic of 401(k) plans. The match was designed to encourage participation and contributions ñ particularly by lower-paid employees. However, at many companies, the employer match became a casualty of the financial collapse and ensuing recession. While several large companies have restored their match, it is still important to understand what causes such a response. This Issue in Brief attempts to explain why some firms suspended their match while others did not. It proceeds as follows. The first section explains the rationale for, and mechanics behind, employer matching of employee contributions. The second section considers the economic impact of the match. The third section describes the companies that have suspended their match. The fourth section examines how several factors impact the probability of an employer suspending its match. The results suggest that liquidity constraints, rather than profitability issues, are the main reasons for suspending the match. The fifth section speculates about the likely impact of the 401(k) match suspensions on employees. The final section concludes that cash-strapped companies appear to have been forced to cut back, and, if the pattern follows that of the 2001 recession, most companies are likely to restore their match once the economy recovers. To the extent that the match is quickly restored, little harm may have been done ñ especially compared with the alternative of laying off workers.

Pages: 12 pages
Date: 2010-02, Revised 2010-02
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