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Monday Business | PERSONAL FINANCE

Many Firms Link 401(k) to Bottom Line

Contributions Rise, Fall With Profit, Loss

March 09, 1998|KATHERINE BURTON | Katherine Burton writes for Bloomberg News and can be reached at kburton@bloomberg.net

More employers are linking their contributions to workers' 401(k) savings plans to company performance.

Take CBS Corp., which told employees in January that the company's contribution would vary depending on its financial success. Contributions are dropping this year, after the company lost 1 cent a share in 1997 rather than gaining the 2-cent profit analysts had expected.

About 14% of companies now tie their 401(k) contributions to corporate performance, up from 4% two years ago, according to Hewitt Associates, a consulting firm.

"Employees see contributions as entitlements, but companies want to put as many performance-related elements in them as possible," said Rick Cornwell, principal at Kwasha Lipton Group of Coopers & Lybrand, a benefits consultant in Fort Lee, N.J.

The move to performance-linked contributions comes as more companies than ever are making contributions to 401(k) savings plans. Among the companies surveyed by Lincolnshire, Ill.-based Hewitt, 93% make some matching contribution to employees' savings plans.

Linking contributions to company performance is a reminder that company payments are voluntary, and are a benefit to workers rather than a duty. That rankles some pension-rights activists who are already dismayed by the shift away from defined-benefit plans to defined-contribution plans, where workers' benefits depend on the performance of investments in individuals' retirement savings accounts.

"Retirement should be something you can count on," said Karen Ferguson, director of the Pension Rights Center in Washington, D.C. By linking contributions to performance, "they are adding an additional element of risk that workers won't have enough to live on when they retire."

Under CBS' old plan, if an employee put 2.5% of his or her salary into a 401(k) plan, the New York-based company matched the entire amount. This year, the company matches only 50% of employee contributions, up to the first 5% of their salary.

"We felt it was a better way of rewarding employees for results," said Jack Bergen, spokesman for the network. If the company had exceeded its goals, it would have contributed twice as much to its employee pension plans, he said.

Members of the American Federation of Television and Radio Artists union are concerned that they will also suffer next year due to corporate strategies over which they have no control. They fear that CBS' performance will be hurt because it paid $4 billion for broadcasting National Football League games over eight years. CBS is also suffering from lower-than-expected ratings for the Winter Olympics in Nagano, Japan.

To allay worker concerns, Cornwell of Kwasha Lipton said companies should design their contributions so that if a company achieves its stated goals, "employees are better off than before."

Cornwell, who helped design a profit-linked retirement plan at glass-and-building-materials maker Owens Corning, said that its employees are getting more in 401(k) contributions and stock than they would if the company's contributions had remained fixed.

Toledo, Ohio-based Owens switched to a performance-based plan in 1996. Last year, when the company said it exceeded its goal by 10%, employees received a matching contribution of up to 5.7% of their salary in their 401(k) plan, plus 4.4% of their salary in stock and an additional 4% of their pay in stock options. Under the old plan, they would have received only a matching contribution in 401(k) plans of up to 5% of their salary.

This year, Owens said its contributions will drop because of a decline last year in its performance as measured by earnings per share, cash flow and sales. The company will match workers' savings contributions up to 4.3% of gross pay and grant shares equal to 1.6% of pay. Stock options will remain unchanged at 4% of pay.

At Warner-Lambert Co., performance-linked contributions have averaged less than they would have if the contributions were fixed, said Steve Dover, director of benefits. Before 1992, the company matched 75% of savings up to 6% of pay. Payments now vary, and were 80% of contributions up to 6% of pay last year, compared with 45% in 1996.

Linking 401(k) contributions to performance is a new idea and it's too early to say whether employees will be better or worse off compared with fixed contributions.

"It's all over the map," said Scott Peterson, who manages the 401(k) business at Hewitt. "I believe companies are doing this so over time employees will be better off. I don't think they are doing this to cut back on contributions."

Will companies benefit from employees who work harder knowing that the size of their 401(k) account will depend on the company's success? That's a question for which there is no answer, said Cornwell of Kwasha Lipton.

*

Katherine Burton writes for Bloomberg News and can be reached at kburton@bloomberg.net

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