Rambling Wednesdays….. ready??

First, sorry for the delay in writing, something is wrong with my eye which is causing me pretty bad headaches.  Headaches bad enough that I’m not sleeping.  So I went back to the doctor today, going to the opthamologist this afternoon, and then to the hospital for an MRI before dinner… fun fun fun…

Anyways…

401(k) Reasons to Make a Stupid Decision

USA Today had a front page article this morning More Companies May End 401(k) Match.  The reporter went on to say:  As the economic slump deepens, more companies are expected to join General Motors in suspending matches of contributions to their employees’ 401(k) retirement accounts.  GM last week became only the latest on a list of well-known companies trying to conserve cash to weather the downturn by halting 401(k) account matches.  Also among them are Goodyear, Frontier Airlines, commercial real estate firm Cushman & Wakefield, broadcast group Entercom and rental car agency Dollar Thrifty Automotive Group.

Penny wise, pound foolish.

According to recently published research, only about half of all employees who are eligible for their company’s 401(k) actually participate, and company contributions average 3% of payroll.

So, let’s do the math… penny wise, or pound foolish?

First, realize that 99.7% of all companies have less than 500 employees, but the largest companies (.3%) employ more than half of all American workers.  So, let’s look at a company with 250 employees.

• Company has 250 employees, half of which contribute to their 401(k) = 125 employees
• Average wages of $34,000 = annual payroll of $8,500,000
• 401(k) costs the company 3% of annual payroll, or $255,000
• Average cost of replacing a worker is conservatively 50% of the employee’s salary = $17,000 per employee
• 410(k) matching costs = the cost of replacing 15 workers, or 6% of the current workforce
• The average unintentional turnover (employees quitting) is 24%.

Hmmm…  The company is betting $255,000 that turnover won’t increase to 30% after getting rid of their match.  If two more people leave, the savings falls to $221,000.  If 10 more leave, that number drops to $85,000.  If another 10 leave, the company will actually lose $85,000.

And this only accounts for the replacement cost of workers.  It doesn’t factor in how less Engaged the employee will be, and how that will affect individual and company attendance, productivity, error rate, customer satisfaction and customer retention.

So this is the bet that these companies will be making: How much more can companies cut compensation and benefits and not lose more employees? All of the firms listed above are in heavily commoditized industries, where the customers have choice.  If companies can’t differentiate their products from their competition, they better be able to do it through the after sales care and support they provide their current customers.  If not, they won’t have to worry about 3% of payroll…  they won’t have a payroll.

Penny Wise, Pound Foolish….