Few Plan Sponsors Planning Retirement Benefit Cuts Right Now

Few companies are cutting salaries or paring back on 401(k) company matches at this time, experts say. For the most part, they are taking a wait-and-see approach right now, hopeful that the economy will bounce back once the coronavirus is eradicated.

However, Brian Shaw, a partner and co-chair of the Financial Restructuring and Bankruptcy practice at Fox Rothschild, says companies should be putting plans in place right now to shore up their cash flow.

“During a potentially severe and prolonged economic crisis such as the current COVID-19 pandemic, a business’ prospects of surviving will be improved if it proactively seeks to preserve cash at the onset of the downturn, rather than responding only reactively to address problems after the downturn has resulted in a loss of most of its cash positions,” Shaw says. “The adage that ‘cash is king’ is particularly true now because a business’s cash and other liquidity quickly diminish for a variety of reasons, including reduced consumer spending, disruptions in supply chains, unavailability of workers and tightening of lending standards.”

Shaw recommends that companies cut back on any unnecessary expense and “prepare a revised forward-looking cash flow analysis that conservatively takes into account factors such as loss of customers, disruption of supply chains, extended payment periods from your trade creditors and defaults or extended payments from your customers and/or account debtors.”

Shaw also recommends that companies plan to ramp up business once the economy recovers.

Ken Abosch, leader of Aon’s Compensation Practice, says labor costs are one of the top three expenses at most companies—if not the biggest expense. “Anything they do that relates to cutting back labor costs will have a substantial impact on cash flow,” Abosch says. “Salaries represent three-quarters of their labor expenses.”

However, because the nation is not yet in an official recession, companies’ responses to the coronavirus pandemic are very different from what occurred in 2008 and 2009 in the Great Recession. “Their response so far has been very different, because there is uncertainty around the permanence of some of the pressures companies are facing right now,” Abosch says. “Organizations are expressing hope that once we come out of the pandemic, there will be some normalizing of the economy, so as a result, we don’t see them resorting to the measures we saw in 2008 and 2009.”

In fact, Aon just surveyed 1,486 companies and found that nearly half, 47%, are not adjusting workers’ compensation right now, he notes. Just 14% are freezing salary increases. Five percent are reducing their bonus payouts, and 10% are adjusting parts of their incentive plan. In fact, many companies, 43%, are continuing to pay field workers who are unable to do their job from their homes.

“It has been a relatively muted response right now because many organizations are waiting to see what happens when the pandemic winds down and what the lasting economic impact will be,” Abosch says. “They are still not sure of what the ultimate outcome of this pandemic looks like, so they don’t want to take measures that are too drastic. In 2008, they cut salaries and terminated employees. Once the economic cycle rebounded, they could not find enough talented workers, so they are taking measures that are a little unconventional to hold onto their workforces.”

Along with that, few companies are cutting back on their 401(k) company matches, notes Melissa Elbert, a partner in Aon’s Retirement Practice. This is probably because 40% of plans are safe harbor plans that preclude plan sponsors from making changes to their match in the middle of the plan year, Elbert says. In speaking with recordkeepers, she says, it seems that only 3% to 5% of companies are looking to reduce their matches.

If a company were to reduce or eliminate its 401(k) match, it could result in the plan not passing nondiscrimination testing and money being returned to some employees, Elbert says. For safe harbor plans, it would also require the sponsor to amend the plan document and send notices to employees 30 days before the cut or elimination becomes effective.

If a company were to cut salaries, that could potentially help with nondiscrimination testing, she says.