In an environment like this, investors expect companies to do whatever they can to resuscitate shrinking profit margins. Layoffs, salary freezes, the free soda in the company cafeteria – nothing is sacred, not even the 401(k) program. Almost 250 companies have stopped matching employees’ contributions to their retirement savings or reduced the match since the beginning of the year (compared with virtually no cuts a year earlier). Dozens more say they plan to. And that, experts say, is a cost-cutting measure that investors shouldn’t be so quick to applaud.
It’s not as though companies are cavalierly axing these benefits; indeed, cutting the 401(k) match is a drastic measure for a troubled company, says Laura Sejen, global director for strategic rewards consulting at Watson Wyatt – and one that is among the last cost-saving moves a troubled firm tries. An increasing body of evidence sheds some light on why: Retirement benefits are an important component of employee satisfaction and loyalty, both of which are cost-effective for companies and good for long-term shareholders. Alex Edmans, a finance professor at Wharton, looked at the connection between employee satisfaction and stock price and found that when companies keep employees happy, their stock outperforms the broad market by more than double. Retirement benefits are only one component of employee satisfaction, he noted, “but the connection is logical.”
The effect of cutting the 401(k) match isn’t measured just over the long term; it indicates other, more immediate, financial trouble as well. A dividend cut is likely in the offing, if it hasn’t happened already, experts say. Of the dividend-paying companies that cut or suspended their 401(k) matches, 18 percent (one out of six) followed by cutting payments to shareholders, too.
Cutting retirement benefits can also prompt higher worker turnover, notes Julie Gorte, who looks at corporate behavior for the Pax World group of mutual funds. Hiring and training a new employee can cost up to four times the ex-worker’s annual salary, according to Pax research, which makes cutting that 3 percent match seem a little less prudent. The bottom line, says Gorte: When a company in your portfolio cuts its retirement benefits for its workers, they shouldn’t be the only ones who take notice.
WHEN A FIRM CUTS ITS 401(K) MATCH
It’s bad news for workers: Almost 250 companies have cut 401(k) matching benefits for employees since the beginning of the year.
And for investors: When a firm axes retirement benefits, it’s a signal the company is grasping for savings, worker morale is heading south and the dividend could be in jeopardy.
How you’ll know: Companies aren’t required to report when they cut employee matches, so watch for news in the local papers or check the Web.
Copyright 2009 The New York Times Syndicate