|Mark Machiz, former Associated Solicitor at the Labor Department during the Clinton administration, and James Delaplane, a vice president of the American Benefits Council, answer your questions on improving retirement security.|
Thomas from Mauldin, SC asks:
It appears that current 401(k)s may enhance a company's bottom line since corporations can use employee funds to buy additional company shares through their "matching" programs.
If it is true, how do corporations benefit from "matching" employee savings? What are some corporate incentives for this type of retirement plan?
How do employees with long-term investment retirement plans align with the objectives of company executives, whose compensation plans and corporate outlooks are typically geared toward the short term?
The corporations get tax advantages. A tax deduction without parting with cash. A further deduction for dividends paid on stock held by Employer-Sponsored Retirement Savings Plans is an ESOP [employee stock ownership plans] featured in many 401(k) plans. Corporations have independent reasons for liking company stock in their plans.
These programs put stock in "friendly hands" discouraging takeover attempts. They are thought to encourage employees to work harder for the good of the corporation, because their investments are tied to the stock price.
There is much debate about the effect of stock options on executive behavior. Do these options encourage destructive behavior designed to give stock prices a short term lift? Employer stock in tax qualified plans for the rank and file can be questioned on many grounds.
But I don't think that a rank and file employee who cares about his job has the same set of incentives as an executive with a generous options package to put the company's short term stock appreciation ahead of the company's real interests.
When employees make matching contributions into 401(k) plans, they do not do so using employee funds. Matching contributions are by definition contributions made using employer resources rather than employee resources.
Most companies that sponsor 401(k) plans provide matching contributions in cash, and then employees are free to direct that cash into whatever investment options the 401(k) plan makes available.
In a limited number of cases -- about 2,000 companies nationwide -- employers provide matching contributions in the form of company stock rather than in cash. Matching contributions by employers help encourage employee savings since receipt of the match by a worker depends on the employee contributing some of his or her own money into the 401(k) plan.
Because they help to boost participation in the 401(k) plan in this way, matching contributions help employers meet the pension regulations which require that employees at all income levels participate in the plan. Matching contributions are also an important benefit that employers offer to help recruit and retain employees.
There are additional reasons why some employers choose to provide their matching contributions in the form of company stock. These companies want to create a culture of ownership among their employees, one in which every employee has a direct ownership stake in the firm. This culture of ownership makes all employees feel part of a common enterprise and can create higher productivity and profitability levels, which is good for everyone at the company.
It can also be cheaper for a company to provide 401(k) matching contributions in stock rather than cash, meaning that employees may receive a bigger match when the match is in stock. Matching in stock also means that some shares of the company will be held in friendly employee hands, which can be helpful in fighting off unwanted corporate takeovers.
Finally, there is a modest additional tax incentive for employers to match in stock rather than cash.