The Return Of The 401K Match

OCEAN CITY — If you’re a business owner with a professional workforce, chances are that at some point you’ve considered offering, or reinstating, a 401(k) match. Long a staple of corporate benefits packages, a 401(k) match became popular with many small and midsize businesses, too, as they strove to stay competetive in the tug-of-war for talent. Before the recession, 74% of companies that sponsored a 401(k) matched employee contributions, but afterward one-fifth of those businesses reduced or suspended it. Now the trend is reversing.

Among those companies that had to eliminate or cut back on their defined contribution plans, nearly one-third have restored them partially or fully, and 58% intend to this year, according to a recent study by Callan Associates.

Whether matching makes sense for your company depends on your hiring and retention needs, balance sheet, industry and location. Here are some factors to help you assess whether offering or beefing up this benefit may make sense for you.

The first question to ask yourself is whether matching will help you retain valued workers, sparing you the high cost of replacing experienced employees.

Larry Rice, CPA, a financial consultant to small businesses with Rodman & Rodman in Newton, Mass., believes the answer is usually yes.

"Our rule of thumb is, if you’ve got someone pretty good, hang on," says Rice. "There’s a cost to training and getting someone up to speed. You can split hairs over the cost of employee benefits and fail to realize that when you go to replace someone, a lesser talent with less ability is priced above the one that left."

Then consider the hiring environment. A shortage of skilled technologists and health professionals has tightened those job markets. In computing and health care, there are three jobs per seeker5; in the fields of medical research and chemistry, two jobs per seeker. Manufacturers are also outperforming as a sector, so hiring is brisk. In those industries, you may have to win talent by shoring up benefits.

The design of your 401(k) plan can be key in attracting and retaining employees, and matching can also be a great incentive to motivate your staff to participate in the plan. You may also want to consider ways to structure vesting in the company match to help with employee retention. If the company match kicks in only after a year or more of service, your staff may decide to stick around to see the full worth of the benefit.

Next, consider your workforce demographics. Statistically, an employee who requires a match is between 30 and 64, an experienced manager or technician with a graduate degree, full-time, and earning a household income of $110,000 or more. That person will want a match to jump ship to you, because she has one right now. Nearly two-thirds of executive or professional staff have generous employer-sponsored retirement benefits; among administrative staff, clerical workers and those in heavy industry, it drops to less than half.

Next, since the 401(k) match isn’t the only way to strengthen retirement benefits, consider whether it’s right for you. While the 401(k) offers flexibility, another incentive might build even more commitment — depending on your staff’s needs. In each case there will be a different cost, eligibility and degree of flexibility for you — not to mention legal, compliance and regulatory reporting concerns. Discuss these with your business lawyer, and consider running through possible budget scenarios with your Financial Advisor and CPA.

One alternative to the 401(k) is the employee stock ownership plan or ESOP. An ESOP, like a 401(k), involves tax-deferred retirement contributions, usually by you, the sponsor. Yet it differs by making employees into part-owners, vesting them with company ownership. There are also employee stock options, which provide recipients with the option to buy a fixed number of company shares at a pre-set price after a certain period of time. Unlike the 401(k), these investments are exclusively in company stock.

While that may sound appealing, it’s important to note that a 401(k) plan provides you more flexibility to choose whether and how much to match, and employees typically have the option, unique to this benefit, of being able to borrow from a 401(k).

The match’s size can also be an incentive, Linton adds. "Matching dollar for dollar up to 3%, the participant contributes only 3% of his or her own salary. If, instead, you match 50 cents on the dollar up to 6% of salary, you’re encouraging the individual to save more at the same business expense to your company"

If affordability is an obstacle, you may be able to offset the cost by cutting back elsewhere, using the benefit as a carrot, says Rice. "Consider what costs employees have control over, and reward them for saving. You can say, ‘If we can get smarter with this 5% item and get it down to 3%, I’ll split the savings with you and put more into the plan.’ Then you automatically know you can afford that higher match."

(A Merrill Lynch Wealth Management Advisor. She can be reached at 410-213-8520.)