Suspending contributions to employees’ retirement accounts can immediately save an organization some cash. As the recession wears on, more businesses are looking at that option.

Still, few are actually taking this step, and the ones that are have said it is temporary. A Watson Wyatt survey in February revealed that 12% of organizations had reduced their 401(k) matching funds, and another 12% expect to.

A March report by WorldatWork delivered better news: 74% of employers said they had not changed their matching contributions as of December; 15% said they increased their match in 2008 or were considering doing so this year.

Quick savings … at what cost?

The average employer contribution is 50 cents on the dollar, up to 6% of an employee’s pay. The cost to employers: about 3% of payroll. Stopping such contributions results in immediate savings that show up every time accounting runs the payroll.

Employees won’t like it if you stop matching their 401(k) contributions, but Leonard Sanicola, WorkatWork’s practice leader for benefits issues, says most would rather take a temporary hit to their retirement savings accounts than lose pay—or their jobs.

Still, when organizations stop matching employee contributions, employees often stop contributing.

In fact, workers are less likely to even join a 401(k) plan if there’s no employer match. A Fidelity Investments report showed that about 30% of employees who participate in a workplace retirement plan contribute only the amount they need to get the full employer match.

How to deliver the bad news

If your organization decides to freeze its matching contributions, soften the blow by explaining why the change is necessary and exactly how much money it will save the organization.

Try these suggestions to make the news easier for employees to bear:

• Have the announcement come from a top executive.
• Tell employees what you’re not going to do—like lay off people this month or cut salaries—because the freeze will save you from it.
• Give employees your best estimate for when the matching will resume: “after the recession,” “when sales improve,” “in 2010.”
• Use words such as “suspend” or “freeze” rather than “cut” or “eliminate.” Nearly all organizations that have stopped matching employee contributions have promised that they will resume at some point.
• Make it clear that the freeze applies to every employee’s 401(k), including those of top executives.

By the numbers: 401(k) participation

If you must suspend 401(k) employer matching contributions, help employees cope with the loss of those retirement-bound dollars by: 

1. Encouraging employees to continue making their own 401(k) contributions, even though the organization won’t match them.

2. Discouraging employees from decreasing the amount they contribute to their plans.

3. Offering a financial education program so employees can learn how to manage their investments.

4. Enlisting a financial advisor to explain to employees the value of participating in a 401(k) even in a troubled economy, and even without employer matching funds.

5. Separately addressing employees in different age groups. The loss of matching funds will affect a 63-year-old employee differently than a 25-year-old.