As a seasoned reporter in the auto industry, I was recently asked about my thoughts on the new 401(k) contribution rate in the agreement between the United Auto Workers (UAW) and major automotive giants Ford, General Motors (GM), and Stellantis. These companies have now committed to increasing their 401(k) contributions from 6.4% to 10% of pay, with no required employee contribution. The question remains: Is this a generous move?
Evaluating Worker Compensation
To assess this deal effectively, it is crucial to establish a framework for evaluating worker/management agreements. One factor that I consider is the pattern of wage growth since 1979. It’s worth noting that median earnings for full-time year-round male workers in 2022 stand at $62,350, slightly higher than the $60,360 recorded in 1979 when adjusted for inflation (see Figure 1). Realistically, this means that the purchasing power for middle-income male workers has remained virtually stagnant for over five decades.
Given this context, any upturn in compensation for these workers is cause for celebration. It’s especially noteworthy when considering the substantial concessions made by the UAW back in 2007 when the automotive companies faced an uncertain future. Moreover, it’s hard to ignore the record-breaking profits that these automakers have achieved in recent years.
The Evolution of Worker Benefits
Within the scope of this agreement, it is essential to recognize the plight of “second-tier” employees who were hired after 2007. These workers have long been subjected to lower wages and fewer benefits. Notably, their retirement coverage shifted from a defined-benefit plan to a 401(k). Restoring the defined-benefit plan remains a significant demand on the UAW’s list of priorities.
In conclusion, while the increase in 401(k) contributions is a step in the right direction, it is crucial to acknowledge the broader trends in worker compensation. The auto industry has experienced significant transformation over the years, and it is necessary to continuously strive for fair and equitable wages and benefits for all employees.
Enhanced Benefits for Auto Workers
The recent negotiations between automakers and worker unions have led to significant improvements in employee benefits. Although the automakers did not agree to restore the defined-benefit plan, they have made several concessions that will positively impact the workers.
Wage Increase and Cost-of-Living Adjustments
One of the key changes is a 25% increase in wages, providing a substantial boost to workers’ incomes. Additionally, the reinstatement of cost-of-living adjustments ensures that employees’ salaries keep pace with inflation, maintaining their purchasing power.
Improved Retirement Benefits
Retirement benefits have also been enhanced, offering workers a more secure future. While the defined-benefit plan remains unchanged, employees enrolled in it will now receive an additional $5 credit each month for every year of service. This means that a worker with 25 years of service would see their monthly retirement benefit increase by $125.
For those hired after the 2007 contract, the automakers have agreed to increase the contribution to the 401(k) plan. This adjustment demonstrates the commitment of the automakers to provide better retirement provisions for all their employees.
A Closer Look at 401(k) Contributions
Concerns have been raised regarding the 10% contribution to the 401(k) plan. However, data from Vanguard suggests that this contribution is higher than what most other employers provide.
When comparing companies that only offer nonmatching contributions, it is rare for a company to solely provide a nonmatching contribution. In fact, only 2% of plan participants received this type of contribution in 2022 (see Table 1).
Moreover, among employers offering nonmatching contributions exclusively, merely 5% of participants were in plans that offered a contribution of 9% or more (see Figure 2). Therefore, the 10% contribution provided by the automakers stands out as a generous offering.
Understanding Employer Contributions
Lastly, let’s examine how the value of employer contributions varies based on the type of contribution.
For nonmatching contributions, the value is simply the percentage of income contributed by the employer. However, for matching contributions, the value is calculated based on the maximum amount promised by the employer.
Overall, the negotiated changes to the automakers’ employee benefits demonstrate a commitment to supporting their workforce and providing enhanced financial security both during employment and in retirement.
Matching Contributions in Retirement Plans
The value of matching contributions in retirement plans can have a significant impact on an employee’s savings. A common type of matching contribution is a match of 50 cents per dollar on the first 6% of pay, resulting in a 3% contribution from the employer.
It is important to note that this calculation might slightly overstate the value of the matching contribution. This is because only two-thirds of participants receive the full employer matching contribution. Nonetheless, this pattern indicates that individuals in plans where the employer provides both a matching and nonmatching contribution may experience combined employer contributions that are comparable to those offered by auto companies (refer to Table 2).
However, it is worth mentioning that the overall 10% nonmatching contribution is considered to be at the higher end of what plan providers typically offer.
All in all, these insights give us reason to be optimistic about the state of retirement plans and the benefits they can provide.