401(k) Update: The Match is Back

EnerNOC, Inc. didn’t offer a 401(k) match to its employees before the recession, but managers there are considering it now.

The $280 million provider of energy management technology has offered automatic enrollment in its 401k plan since December 2008. Currently 85 percent of its 555 U.S. employees participate in the plan.

Internal benefits surveys indicate that employees would like the company to contribute toward their savings, says Melissa Zaino, EnerNOC’s benefits and HR information systems manager. "It’s an important and competitive part of their compensation," she says. The company is looking into providing matching funds, but hasn’t finalized a plan.

During the recession, nearly one in five U.S. companies with at least 1,000 workers suspended 401(k) match programs, according to consulting firm Towers Watson.

But as the economy rebounds, more mid-sized companies are reinstating or introducing tax-deferred matching contributions or getting ready to do so. In a survey of about 500 U.S. chief financial officers by Duke University and CFO Magazine, 43 percent that previously slashed 401(k) matches expect to restore them in the next year or already have done so, compared with only 12 percent that reported taking similar actions this time last year.

Anecdotal evidence bears that out. Boston-based Longfellow Benefits is seeing a large uptick in requests for benchmarking information on matching and vesting schedules from mid-sized companies that never had a match or had one and are bringing it back, says David Boucher, senior vice president of corporate benefits at the firm.

A Competitive Part of Compensation
For companies like EnerNOC that employ engineers, software developers and other highly-skilled workers, a 401(k) match can make the difference between retaining and losing talented staff.

Tim Tunney learned the importance of 401(k) plans early in his 25-year human resources career. “Because of the uncertainty of Social Security and the obsolescence of pension plans, people need a 401(k) as one of the legs of a three-legged retirement program stool,” says Tunney, director of human resources for Riso, the U.S. subsidiary of Tokyo-based Riso Kaguko.

In 2007, the publicly-traded maker of high-speed printers slashed its U.S. staff more than 60 percent, to 135 from 350, due to the recession and a change in business strategy. But Riso didn’t touch its 401(k) plan.

The plan, which was in place before Tunney joined the business five years ago, matches the first 5 percent of eligible employee contributions dollar for dollar. “Management believed it was more important to invest in the employees during tough times,” says Tunney, who also acts as Riso’s 401(k) plan sponsor. Keeping staff morale high is critical to the company’s long-term success, he says.

Managing the Plan
Overseeing a 401(k) plan means selecting diverse funds and managing their performance to maximize return on investment, says Jonathan Bergman, vice president and chief investment officer of Palisades Hudson Financial Group, a fee-only financial planning firm in Scarsdale, New York.

Many CFOs juggle multiple responsibilities. As the economy improves and the job market gets more competitive, they are balancing the need to retain skilled workers with the need to limit costs. So the details of administering a 401(k) plan can become a low priority, Bergman says.

Some companies compensate by hiring an independent advisor to help their finance teams with certain 401(k) plan responsibilities, including making investment suggestions and offering employees educational presentations and general financial advice. If CFOs choose that route, Boucher suggests clarifying up front whether an advisor will be held to a fiduciary standard, that is, whether they’ll enter into a “legal and ethical relationship of trust” regarding how funds are managed, or if it’s a straight brokerage relationship. If it’s the latter, the advisor may charge higher fees and offer a select array of funds for which it earns commission.

On the Lookout for High Fees
Some 401(k) plans charge participants fees of 3 percent or more of the account balance each year to cover management costs, broker commissions and recordkeeping, an amount Bergman calls “egregious.” Since fees come out of employees’ investments, they have less for retirement.

A more reasonable fee is 1 percent to 1.5 percent, depending on the size of the company and number of participants, Bergman says. CFOs or other 401(k) plan administrators can minimize fees by working with independent advisors who offer full 401(k) services and reduce total plan expenses. Bergman says. They can also keep tabs on 401(k) plans using Brightscope and other plan-rating services.

One company that Boucher worked with saved $100,000, or about $500 per employee per year, once its $26 million plan was properly benchmarked. “This should be done on an annual basis and tracked,” he says.

Controlling Costs, Keeping Employees Happy
To keep a lid on costs and boost morale, companies can tie matches to a designated dollar amount rather than to a percentage of an employee’s pay. “Many are saying they have a certain pool of money to allocate for a match,” Boucher says, “The next step is to determine how we can we create a dollar cap for each employee that won’t put the business over that figure.”

The plan sponsor must work out a formula based on current participation to forecast the maximum match dollars per employee. In other words, if a company has 350 employees participating in its 401(k) plan and an $800,000 annual funding pool, each worker’s contribution would be matched by up to $2,285 per year.

Boucher says some CFOs are looking into 401(k) plan matches that include a waiting period, or only match base salary and not bonuses or other compensation. “It’s a way to get fanfare but mitigate their financial exposure,” he says.

Boosting the Bottom Line
Any 401(k) plan, especially one with a company match, needs to be properly presented to a company’s workforce. “They need to know how much it will cost the business to put that plan into place and how impactful it can be to their retirement,” he says.

For companies, educating employees can be the difference between blindly giving away money and providing workers with tools to allocate funds in a way that will maximize their returns. The financial impact of a properly administered 401(k) may not appear as a line item to a mid-sized company, says Boucher, “but the benefit to employee morale is huge.”