US companies pull out of retirement contributions

A wave of US companies are suspending payments to their staff 401(k) retirement plans in a bid to cut costs amid the economic downturn.

Saks, General Motors, newspaper group McClatchy, clothing company J.Crew, FedEx, UPS, Coca-Cola Bottling, Reader’s Digest, Motorola, Regions Financial and Sprint Nextel are among the growing list of companies which have suspended contributions in recent months.

Even the AARP, the influential advocacy group formerly known as the American Association for Retired Persons, will suspend contributions to its staff 401(k) plan from March 22 for the rest of the year.

The growing number of suspensions appears to strike a blow against the viability of 401(k) plans, which were introduced 30 years ago as the main way that Americans should save for retirement, replacing defined benefit pension plans. Companies typically offered to match employee contributions up to 5 per cent of annual salary.

The average 401(k) plan at the end of 2007 held about $65,000, but half of them held less than $19,000, according to a trade group, the Investment Companies Institute. They would hold much less today because of stock market falls. The suspensions mean that individuals can continue to contribute to their plans, but their companies will not.

Adam Sohn, a spokesman for AARP, said his organisation, which has 40m members aged 50 and over, had fully matched staff contributions up to 3 per cent of annual salary.

“We have taken a temporary suspension for the remainder of the year to help with cost containment measures,” he said. The AARP, whose revenue comes in part from investment income, also offers its 2,400 staff a defined benefit pension plan.

In recent months, companies have also become increasingly less likely to enrol new workers automatically in their 401(k) plan, citing the costs as the mainreason, according to a study by Hewitt Associates, a human resources consultancy.

“The continued bleak economic outlook is forcing many companies to make difficult decisions with respect to their retirement benefits,” said Pamela Hess, Hewitt’s director of retirement research, said in the study.

Hewitt estimated that only 5 per cent of large companies would halt 401(k) contributions in 2009, but that could rise to more than 10 per cent in the next 12 to 18 months.

10 Mar 2009 11:34pm
By Deborah Brewster in New York

Source: The Financial Times

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