As part of its bid to turn around the troubled company, Atlanta-based First Data disclosed last week that the credit card processor will no longer match employee contributions to the company’s 401(k) program. Instead, virtually all employees will receive company stock, which they would be eligible to trade if the private company goes public.
“We believe we are making a far greater gift to our employees through the equity award,” First Data spokesman Chip Swearngan said in an email.
The company, which employs 1,400 people in metro Atlanta and 24,000 around the world, wants to align the goals of its workers with those of its new CEO — namely, to turn around a business that has been losing money for years. In the first quarter, First Data lost $337 million, and the company has struggled under the weight of its debt since being taken over by Kohlberg Kravis Roberts & Co. for $27.5 billion in 2007.
But industry experts don’t expect First Data to revive a trend of companies substituting company stock for 401(k) contributions. In fact, the recent trend has been something of the reverse.
As the U.S. economy has improved, many companies that suspended or ended their contributions to employees’ retirement plans in a bid to save money during the recession have reinstated the company matches. Fewer businesses are reducing the benefits, which help companies attract and keep employees.
Lynn Dudley, the senior vice president of retirement and international policy for the American Benefits Council, and others said most companies have gotten away from offering stock to employees. She does not expect First Data’s move to spur other businesses to return to it.
In 2011, 8 percent of the average 401(k) was company stock, down from 19 percent in 1999, according to the Employee Benefit Research Institute.
“You see it in younger companies,” Dudley said. “It’s common in companies that are turning themselves around. Companies like that have difficulty getting good people.”
The potential for a large payout if the company improves can entice some workers more than a 401(k) match would, Dudley said. It did for her, when she joined a technology company on the verge of going under. The company succeeded, and Dudley received a payout when it was purchased.
Still, it doesn’t always work out. Enron employees who had stock in the company lost their retirements when it went bankrupt.
“Enron certainly taught us the lesson that you don’t want to have your retirement and your job all in one basket,” said Rob Austin, a senior consultant with Aon Hewitt. “I would not expect this to be a broad-based trend.”
In the First Data plan, employees will still be able to make their own contributions to their retirement plans after the company’s 3.5 percent match is suspended in 2014. Swearngan said the company, one of Atlanta’s largest, has not announced whether the match will be reinstated after that calendar year.
While employees will not be able to sell their stock until First Data goes public, Swearngan said CEO Frank Bisignano hopes that the company will improve, and workers will prosper. First Data’s entry-level U.S. employees will receive about 400 shares worth $3.50 each as part of the award.
“It probably would be a little too rich of a gift to give both the equity and the match,” he said of the struggling company. “Our intent is not to give something not worth anything to our employees. We’re giving them value today, and we believe it will have greater value in the future.”
Overall, workers are taking more responsibility for their own retirements. Companies like Equifax and NCR in metro Atlanta announced last year that they were offering employees lump-sum pension payouts to save on costs. Fewer than half of workers participate in an employee retirement program, a number that rose slightly in 2011 after falling for three years, according to the Employee Benefit Research Institute.
In 2011, 31 percent of private-sector workers participated in a defined contribution plan, like a 401(k). Just 3 percent had a defined benefit plan, like a pension. An additional 11 percent of employees participated in both.
Last year, 4 percent of employers reduced benefits contributions, said Jeanne Thompson, vice president of thought leadership for Fidelity Investments. That’s down from 11 percent who did so in 2009. Between 2008 and 2012, 72 percent of businesses left their match contributions unchanged, with the bulk of changes coming from companies with fewer than 500 employees. Those businesses likely made the changes in an effort to keep the lights on, she said.
“There are more people increasing (their match) than decreasing,” she said. “Any company that has the financial means definitely wants to offer it.”
Offering stock instead of a match is likely a better alternative than eliminating any company contribution, said Stephen Blakely, editor at the Employee Benefit Research Institute. But Loren Rodgers, executive director for the National Center for Employee Ownership, said statistics show that returns on company stock tend to fare better than average 401(k)s. Businesses that are owned by employees tend to do better, he said, because workers see themselves as part of the group that will help a business to succeed.
If the company continues to suffer, there’s a chance that that ownership stake could lead to lower employee morale, Rodgers said.
Employee buy-in matters, and for First Data, it may be helpful for workers to benefit directly if its fortunes improve. In the end, though, what a company offers for retirement benefits comes down to the bottom line.
“Cost is a primary driver,” Austin, the Aon Hewitt consultant, said. “It comes down to dollars and cents.”