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Companies scaling back matching 401(k) contributions

February 15, 2014 at 8:02 PM EDT
Major companies are getting attention for scaling back on matching contributions to their employees' 401(k) plans. Hari Sreenivasan talks with Lauren Young, Money Editor for Thomson Reuters, about a story that has major implications for American workers planning for their retirement.
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HARI SREENIVASAN: There’s been a lot of news recently about major corporations scaling back on their matching contributions to their employees 401(k) plans. It’s a story that has major implications for American workers planning for their retirement. For more about this, we’re joined by Lauren Young, she’s the Money Editor for Thomson Reuters. So, this week we have this story about AOL CEO rolling back plans that the company had made to try and give everyone their 401(k) money at one point in the year, instead of with every paycheck. Explain that big difference.

LAUREN YOUNG: Okay, so there’s two big differences here. There’s the retention side of it and there’s the investment side of it. The retention side is you can’t leave your job if you’re waiting to get your 401(k) money, or you’re gonna leave and you’re not gonna get your money because they’re paying it at the end of the year. That’s number one. Number two, there’s the investment part of it and it’s really, really technical, but there’s something called dollar cost averaging that investment gurus like me pay attention too. And you put a little bit of money into the market with each paycheck, but if you’re not only getting that money at the end of the year it means you’re not riding the up and down movements of the market. You’re really taking an investment risk by putting a large sum of money in at once.

HARI SREENIVASAN: So what are other companies doing? What other tactics are they doing to change their retirement or 401(k) plans with people?

LAUREN YOUNG: So there’s a lot of different things at play here, clearly the uproar against AOL had a great outcome for workers. But IBM was actually the first company to do this, or the first big company where they said that they’re going to pay once a year. That said, IBM has really good benefits and they rank really highly on a website called brightscope.com — and it’s a great website to go an check retirement benefits. So, for those workers it doesn’t hurt as much, but there are a lot of different things happening here. Tech companies, for example, a company like Facebook doesn’t offer a 401(k) match currently. Although they do plan to offer one later in the year.

HARI SREENIVASAN: And what about companies offering matches? Has that changed over time?

LAUREN YOUNG: During the bust, when the market went belly up, a lot of companies had to scale back their benefits just to keep their lights on. So there were a lot of companies who stopped offering that match. It has ratcheted up as the market has improved, but, for example, in the banking sector a lot of companies — we were talking about not getting that match — they’re not getting it til the end of the year too, in that industry. And it can be very industry specific.

HARI SREENIVASAN: And what about this shift towards saving more? I mean at one point the investment industry said 401(k)’s will encourage more people to save more money. Now we’ve had that running for 20 or 30 years, how does the data pan out?

LAUREN YOUNG: It’s not working very well, is it? The average worker has a pretty low retirement balance. But people working at big companies that are serviced by Fidelity Investments, for example, at the end of the quarter they had about $86,000 dollars, the average worker, in their 401(k) plan. That’s not enough money to do very much. And it’s certainly not gonna pay for a nursing home for a year.

HARI SREENIVASAN: And it has a disproportionate effect, I’m imagining, on sort of lower end or medium end workers than it does the executives who don’t necessarily care much about whether the company is matching their 401(k) or not.

LAUREN YOUNG: Absolutely. A company like Walmart, for example, the average worker there has a balance that’s less than $20,000 dollars.

HARI SREENIVASAN: And so how does that add up over… to be a big difference by the time you retire?

LAUREN YOUNG: It’s a huge difference by the time you retire. And there are some changes happening. A lot of companies are automatically investing you in a retirement account right now to really nudge you to put money in. But the problem is that people are just putting in enough money to get the match. They’re not putting in that maximum amount, which is $17,500 dollars this year and it changes every year, and it’s more if you’re nearing retirement — but it’s not enough money to live on frankly.

HARI SREENIVASAN: And so if you short change yourself $500 bucks , or save $200 dollars or whatever now — how does that compounding interest add up over time?

LAUREN YOUNG: So, some calculations, for example, done by Vanguard for the New York Times, which was a great story. They found that the average worker is probably gonna have about $50,000 dollars less at the end of everything if the company did what AOL did and just gave you a once a year pay out.

HARI SREENIVASAN: All right, Lauren Young from Reuters. Thanks so much.

LAUREN YOUNG: Thank you.