The sputtering economy has had an impact everywhere, including on the golden years.
“There are presently no shortages on worries,” said Edward Fredericks, partner at the Connecticut Group in Westport.
According to pension industry professionals, employees who retain their retiring benefits should be looking at the downturn as downtime. Cutbacks in company contributions have already begun.
“Right now, companies are slashing jobs and they are looking to cut costs wherever they can,” said David Gensler, president of Madison Pension Services in Purchase, N.Y.
Fredericks said, cutbacks will directly parallel the economy and will remain in place as long as the economy deteriorates.
“Just as a rising tide lifts all boats, a lowering tide has the opposite impact, with some boats getting stuck, becoming damaged beyond repair, never to sail out to sea again.”
According to Gensler, the list of public companies that have already cut back or suspended their matching retirement contributions includes some of the largest companies in America: Frontier Airlines, Dollar Thrifty, General Motors and Cushman & Wakefield.
“Many small and mid-sized companies are sure to follow suit,” said Gensler.
According to Fredericks, over the past year he has not yet seen a big uptick in cutbacks for matching contributions because many companies have committed to declared matches from the previous year.
“We are seeing the cutbacks in the profit-sharing contributions,” said Fredericks.
According to Gensler, the tightening of pensions has caused employees to cut back on their own salary deferrals, consequently eroding the amount of money that will someday be available for each retirement.Â
“All of this of course occurs just at the time that many employees have experienced a 20 percent to 30 percent reduction in the value of their account as a result of the recent volatility in the market,” said Gensler.
Peter Gioia, vice president and economist for Connecticut Business & Industry Association, said employers cutting back on defined benefit pensions is a trend that is likely to continue.
“With 401(k) programs, I do not see a cutback as its important tool to hire and retain folks,” said Gioia.
According to Gioia and Gensler, the dramatic decrease in the value of 401(k)s had already caused many employees to reduce or stop their deferrals; the elimination of the company match and any layoffs will only cause a further diminution of employee deferrals.
“Since August, we have been meeting with clients, both employers and employees, providing them with education, hand-holding and speaking to them both about the importance of staying the course,” said Fredericks.
“The reduction in both employer and employee contributions is significant for two reasons,” said Gensler. “First of all, from the employee”™s point of view, when the market is down, that is actually the time that, if anything, an employee should increase their deferrals into the plan.”Â
Gensler said when the market is down, the employees”™ salary deferrals are purchasing more units of various funds. When the market recovers, it does not have to go up as much to help the employees get back to where they were before the decline.Â
“The additional units purchased when the market was depressed act as a booster when the market goes up again,” said Gensler. “This concept is known as dollar cost averaging and investment advisers universally recommend it to their clients as a fundamental approach to investing in mutual funds over a long period of time.”Â
According to Fredericks, adding deferrals is something that the pension world preaches whether the market is up or down.
“Let”™s face it, no one ever gets to retirement only to realize that they are disappointed because they have too much money,” said Fredericks.
According to Gensler, cutting back on salary deferrals makes it that much more difficult to grow accounts when the market recovers.Â
Gensler said the reduction in contributions into the 401(k)s increase both the length and the depth of a recession.Â
“Reduced employee and employer contributions means less money flowing into the stock market,” said Gensler. “When that flow of money is choked off, capital markets struggle and that just feeds into negative mindset that always exists during a recession.”
Fredericks said employees should be meeting with their financial advisers.
“Obviously, when the major stock market indexes are off as significantly as they are you would think there are benefits here, but as an adviser, you can”™t introduce a blanket statement,” said Fredericks. “Financial advisers need to have the conversation with their clients to see what is right on an individual basis. Remember, time horizons matter, an investor, who is 25 years old, has a much different perspective than an investor who is 65 years old.”
Fredericks said managerial staff should do everything possible to continue to have the retirement plan perceived as a benefit.
“Remember, a benefit that is perceived to be of no benefit doesn”™t have much of a value,” said Fredericks.
According to Gensler, if companies must cut expenses, they should see if the match can be reduced, rather than eliminated.Â
“This will pay big dividends with your employees”™ morale if it is explained properly,” said Gensler. “Making sure that you are well diversified and continuing to defer money into the 401(k) plan, match or no match, is still the best strategy.”
