Schwab is scrapping 401(k) contributions

Brokerage was champion of the retirement plans


Charles Schwab Corp., which is struggling through the worst slump in its history, yesterday became the latest in a string of large companies to tell employees it would stop making matching contributions to their retirement-savings plans.

The move follows extensive layoffs and is a painful cost-cutting move for Schwab and its chairman, Charles R. Schwab, who has been a forceful champion of the 401(k) plan, a retirement instrument that has been replacing traditional pensions in the workplace for more than a decade.

Other companies that have said that they were reducing or halting such contributions include Ford, DaimlerChrysler, Goodyear Tire & Rubber, Great Northern Paper, Tech Data, El Paso Corp. and CMS Energy Co.

Employees are usually free to choose whether to participate in 401(k) plans, and benefits specialists say that the presence or absence of a company matching contribution is one of the most powerful factors in their decisions. Until now, the incentive has been strong enough to keep employees from dropping out of the workplace retirement programs even as market returns have waned, survey data suggest.

As more companies eliminate their contributions, the rate at which Americans save for retirement - already considered insufficient - may drop still further.

"Eliminating a match has potentially disastrous effects, based on all the empirical evidence," said Alicia H. Munnell, director of the Center for Retirement Research at Boston College. "People are not good at saving. You have to have a long time horizon, and you really have to have something that induces you to do it. Employer matches are a very attractive incentive."

Matching contributions have been very popular with employees, helping to make 401(k) plans the second-most prized company benefit, according to a survey by the Principal Financial Group, a large provider of plan administrative services.

But as the economy sputters, companies are reviewing retirement plans, health insurance and other benefits, seeking ways to reduce labor costs without actually cutting jobs.

However painful it may be to cut 401(k) matching contributions, it still can be easier than cutting other benefits, such as traditional pensions, which are tightly regulated and cannot be reduced once they have been earned.

There are few current statistics tracking the overall availability of company matching contributions; most surveys go up to 2001 and then stop.

But some consultants who help companies set up benefits programs say a number are reviewing whether to reduce their contributions, or link them to profitability, if not eliminate them altogether.

Robyn Credico, a senior consultant with Watson Wyatt who specializes in 401(k) plans and similar retirement programs, said many of the cuts have been confined to certain depressed sectors of the economy.

Ford Motor Co. and DaimlerChrysler, for example, suspended their 401(k) matches for 2002 as they aggressively cut costs in attempts to turn the companies around.

The cuts applied only to salaried workers, not hourly employees. Anne Marie Gattari, a Ford spokeswoman, said the company planned to reinstate its matching contributions when market conditions improve.

Credico said the companies she works with are also thinking of temporary suspensions. "They're not saying to employees, `This is forever,'" she said.

At Schwab, the 401(k) plan has been quite generous. Until now, the brokerage firm offered participating employees $2 for every dollar they put into their accounts, up to a limit of $250 a year. After that, a Schwab spokesman said, the company matched each dollar contributed by employees with a dollar, up to 5 percent of their annual compensation.

Christopher V. Dodds, Schwab's chief financial officer, said that suspending this contribution scheme would save the company a "reasonably significant" amount, though less than $15 million a quarter.

The end of matching contributions follows other cost-cutting measures at Schwab. The company, based in San Francisco, has eliminated 9,000 jobs since the end of 2000, a reduction of 35 percent. Dodds said the company chose to cut the retirement benefit rather than make another round of layoffs.

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