End of the 401(k) match leaves workers in the lurch

Two major market crashes in a single decade have smashed the assumptions of retirement savers everywhere. And now, numerous employers are reneging on their part of the retirement equation - taking the dollars off the table they've traditionally added to workers' 401(k) savings just when employees need the help most.

It's happening across the country, at publisher Houghton Mifflin Co., at Beth Israel Deaconess Medical Center, at Xerox Corp., and at General Motors Corp. Companies looking to cut costs amid the slow economy are trimming or eliminating retirement contributions to conserve cash. Many employers and consultants say it's just temporary, that these retirement benefits will come back in better times. But to millions of working people, there's a growing sense that when it comes to retirement, they're on their own.

Michael Tow, president of the financial planning firm New Boston Financial, said several of his clients have lost their 401(k) match in recent months. And while it's hard to argue with companies taking steps to avoid layoffs or simply survive, it's unwelcome news when people are already feeling strained, he said.

"It really puts the onus back on the individual," Tow said. "You can't rely on other people. You have to do it yourself."

More than 200 US companies have disclosed plans to eliminate their 401(k) matches or trim them back in the past year, according to the Pension Rights Center, a consumer advocacy group in Washington. They're doing it, they say, to save jobs. But as the traditional pension plan has all but disappeared, it's disconcerting for workers to see employers take away their last remaining contribution to retirement. Seven percent of companies in the Fortune 500 have dropped or trimmed the 401(k) match this year, according to benefits consultancy Hewitt Associates.

At Beth Israel, about 5,000 employees lost their 401(k) matches in April. The hospital had matched 50 percent of what they contributed, up to 2 percent of their pay. The cut is meant to be temporary - more palatable than cutting pay because workers don't feel the pain right away - but it will continue at least through 2010, the hospital's chief executive, Paul Levy, has said.

Hewitt says companies can save $1,500 per employee, on average, by cutting the 401(k) match. That can add up to $10 million in annual savings for a mid-sized company and $25 million for a large company, Hewitt said.

At Xerox, based in Norwalk, Conn., the company said suspending its 401(k) match for US employees was part of a broader effort to save $300 million, to "help to boost our profit and cash position." The New York Times Co., which owns The Boston Globe, has asked the Globe's union employees to ratify contracts that give up 401(k) matches. That, along with other concessions, is meant to help the paper save about $20 million.

For firms like Fidelity Investments that manage money in retirement plans, it's in their interest to advise corporate clients not to make draconian cuts. They are telling companies to trim back their matches if they have to, but not to eliminate them. Cutting the benefit not only hurts employees' savings efforts, the company said, but it removes a key incentive to getting workers - particularly younger ones - to save.

And the pullback is coming on the heels of last year's massive stock market decline, which devoured more than a quarter of the value of the typical retirement plan, and $1 trillion in total. The result has been a psychological blow to workers, wondering how they will catch up.

Nicole Cannava, a 31-year-old who works at Bank of America in Boston, said her retirement plan savings have dropped in half, to $10,000. She knows she has at least 30 years to save if she retires in her sixties, but, she said, "It's not fun to see what I've worked for go down."

Michael G. Doshier, a vice president of marketing at Fidelity Investments, which holds nearly one-quarter of all the 401(k) assets in the country, acknowledged the psychological toll of the market's drop and plan cuts. "Because of the sheer depth of this market downturn, people are rethinking investing and saving for retirement in general," Doshier said. "There is clearly an emotional side."

Cheryl A. Costa, managing director of AFW Wealth Advisors and a blogger for Boston.com, said the loss of a 401(k) match will set many people back.

"In the back of your mind, you have to be prepared that it just might not be there," Costa said. "At the end of the day, you're just going to have to cut out some expenses and save more."

Indeed, that message hasn't escaped anyone who's had the guts to check an online retirement calculator recently. Most people over 40 are finding that they have to save more to make up for the large, recent losses. And even younger workers face an uphill climb, as many have seen their early savings efforts all but evaporate.

There's also a major recalibration underway of what investors can expect even in better times. Assumptions of 10 percent average annual gains have been scaled back to 7 percent or 8 percent by many professionals, making the savings goal that much harder to reach.

Planners say annual return targets in the range of 10 percent or more that emerged in the boom years of the late 1990s are now probably unreasonable. It's common, they say, to weigh recent experience more heavily than the past - which is why it's natural to be pessimistic right now. But, said Tow, the financial planner, "Stopping the 401(k) is definitely the worst thing you can do."

The reality is, workers have little choice but to keep saving whatever they can on their own. And most are doing so even in the worst of times, according to Fidelity. The company says 97 percent of its customers have continued to stash money in their plans.

On average, workers contributed $1,700 of their pre-tax income to workplace retirement accounts in the first quarter of 2009, down from $1,860 a year ago. Including employer contributions, typical savers added $2,780 to their accounts, down 10 percent from a year ago.

In the last downturn, early this decade, when a number of employers also suspended their 401(k) matches, 48 percent reinstated the match within 12 months, according to Fidelity's research.

Alicia H. Munnell, director for the Center for Retirement Research at Boston College and a former Federal Reserve Bank of Boston official, said she expects the same thing to happen this time around. "My sense is that when this recession is over, employers will reinstate," she said.

Munnell said cutting the employer match does dissuade some people from saving but "there's no alternative. If you don't save through your employer's plan, you're not going to save at all. Lecturing people to save more on their own is just wasting wind."

Beth Healy can be reached at bhealy@globe.com.