Many companies had to make tough economic decisions to whittle costs and stay afloat during the prolonged recession. To avoid or lessen the number of layoffs, some companies chose to freeze matching contributions to their 401(k) plans. However, now that the economy is showing signs of improvement, many companies are reinvesting in human capital by reinstating employer matches to 401(k) plans, according to a recent Fidelity Investments survey.  

Meet your match: Bringing the dollars back to employee 401(k) contributions

Many companies had to make tough economic decisions to whittle costs and stay afloat during the prolonged recession. To avoid or lessen the number of layoffs, some companies chose to freeze matching contributions to their 401(k) plans. However, now that the economy is showing signs of improvement, many companies are reinvesting in human capital by reinstating employer matches to 401(k) plans, according to a recent Fidelity Investments survey. 

Of the 293 U.S. employers who suspended matching contributions last year, Fidelity found 44 percent have restored or intend to restore the match by next year. According to the survey, employers with 5,000 or more workers are leading the trend with 71 percent reporting they have restored the match or intend to restore it within the year.. Manufacturing companies are leading industries as well -- 52 percent of manufacturing firms report they have restored the match or intend to do so. The other top 401(k) restorers include professional services companies (44 percent) and information services companies (36 percent). 

"The decision to implement or reinstate a company matching contribution is an important, and typically expensive, decision," explained Thomas Connolly, vice president business development for Ceridian partner, Great-West Retirement Services (Great-West). "Most 401(k) plan documents offer flexibility in terms of the structure of employer 'matching' contributions. Employer contributions can be made as a percentage of the employee's deferral or as a year-end profit sharing type of contribution. Employer matching contributions can also be combined with profit sharing contributions if the employer is so inclined."

Connolly notes that the most common match is 50 percent on the first 6 percent of an employee's deferral (equaling 3 percent of pay if the employee chooses to defer 6 percent or more). However, studies have shown that any type of matching contribution causes increased participation rates amongst employees. Employee participation is critical to the success and overall "health" of a 401(k) plan as it typically helps the plan pass nondiscrimination testing, which compares the deferral rates of highly compensated versus nonhighly compensated employees as defined by the IRS. 

Speaking from experience 
As a human resources services company with broad, deep expertise in all areas of human resource management, Ceridian uses its knowledge of HR best practices to focus on its employee programs. Ceridian recently made a careful, measured analysis of its 401(k) plan. That analysis led to considerations about how the plan could be modified so it would continue to meet employee expectations and remain competitive when compared with other company plans in the marketplace. After considering several plan modifications, Ceridian implemented three changes that achieved the company's overall goals and reduced plan costs significantly in year-over-year expenses. 

Ceridian uses the five-step DMAIC methodology to improve business processes: define, measure, analyze, improve and control. As applied to the changes made to Ceridian's 401(k) plan, the steps included the following: 

  • Define: Clearly define the 401(k) problem or issue being considered.
  • Measure: Describe all the costs and different parts of Ceridian's current (2008 and before) 401(k) plan.
  • Analyze: Benchmark Ceridian's pre-2009 401(k) plan to get a sense of how it compares with comparable company plans.
  • Improve: Contemplate (and ultimately implement) 401(k) plan changes that improve the plan.
  • Control: Periodically measure the success of 401(k) improvements.

Ceridian's recent review of its 401(k) plan resulted in the following significant changes that saved Ceridian substantial costs while continuing to offer a competitive benefit to meet employee expectations: 

  • Ceridian reduced its 401(k) plan expenses by $3.265 million per year.
  • Changes to Ceridian's 401(k) plan did not affect participation rates.
  • Ceridian's current 401(k) plan continues to be comparable to similar plans offered by other companies.
  • Changes to Ceridian's 401(k) plan employer contribution match formula had a positive effect on average employee 401(k) savings rates.

Additionally, the increased amount required for plan participants to reach the maximum employer contribution (from 5 percent in the old plan to 6 percent in the new plan) has had the positive effect of increasing participant savings rates. The most popular savings rate under the old plan was 5 percent. Under the new plan, the most popular savings rate rose to 6 percent. And, while the majority of plan savings derived from reducing the employer contribution by 1 percent (from 4 percent to 3 percent), the reduction had no negative effect on employee perspectives as measured by Ceridian's 2009 Employee Engagement Survey. 

"Most employers make matching contributions for reasons commonly referred to as the 'A.R.M.' theory, which is to attract, retain, or motivate employees," added Connolly. "Employers should always consult with their 401(k) plan advisor, their plan providers and/or local third-party administrators to best design the plan, its employer match and vesting schedules to help meet the employer's specific goals." 

Building a bridge to new capabilities 
In reinstating 401(k) matches, employers also can operate more efficiently by streamlining the processing of their employees' 401(k) contributions. Traditionally, plan sponsors often act as middlemen between their payroll vendors and their record keepers to ensure that each has the needed information to keep things running smoothly. This can mean collecting and distributing the same information multiple times -- when processing contributions each payroll cycle and when completing other critical tasks such as compliance testing and eligibility reporting. Fortunately, Ceridian and Great-West offer a more efficient and effective alternative. 

With Payroll Bridge from Ceridian and Great-West, you can significantly streamline contribution processing by reducing your middleman role in the transmission of contribution information.