By ALLISSA KLINE
Business First

It's no surprise that the economic freefall is slicing into 401(k) earnings.

As a result, some employers are rethinking their participation in the defined contribution plans.

Leaders at Dunkirk Metal Products are having second thoughts about offering a 401(k) plan to employees, company president Bill Raines said. Right now, the metal fabrication business matches employee contributions up to 4 percent.

"We tried to offer the 401(k) because we thought it was a good investment vehicle, but that certainly has changed," Raines said. "It's a savings thing, but I wonder if there isn't some other vehicle in the present economy that's a better option for employees."

For now, local companies seem to be sticking with their 401(k) plans, which are increasingly becoming the preferred retirement-savings option. Pension Services of Western New York Inc., administrator of 401(k)s and other retirement plans throughout upstate New York, said 1 percent of its 300 clients have suspended employer-matching plans due to the poor economic climate.

Other trends noticed by Pension Services:

• Very few employees whose plans are administered by Pension Services are reducing their individual contributions.

• Some employers are making smaller profit-sharing contributions, which take place once a year instead of the more frequent matching contributions.

• Some companies are choosing to make no profit-sharing contributions at all this year.

While "the jury's out" on how severe the changes could be for profit-sharing contributions, concerns are mounting when it comes to employees withdrawing their 401(k) funds, said Lawrence Kavanaugh Jr., vice president of sales at Pension Services.

"Typically we see accounts under $5,000 cashing out all the time, but that threshold is moving up to $20,000 to $25,000," Kavanaugh said. "It's a disturbing trend and probably indicative of the consequences of losing employment and the poor prospects of replacing that employment. I've never seen the cash out of distributions like this and it's kind of scary."

As traditional pension plans continue to phase out, more companies sponsor 401(k) plans rather than fully support defined benefit plans. Under 401(k)s, employees contribute pre-tax earnings to the fund, up to 15 percent of each paycheck, in hopes of building retirement savings. Employers may choose to match contributions or make a lump sum profit-sharing contribution to each participating employees' 401(k) fund.

Employees who withdraw the money before age 59-and-a-half must pay state and federal income taxes on the money, along with a 10 percent early-withdrawal penalty fee on the amount of money withdrawn.

Although some employers have pulled back on matching or profit-sharing contributions, Michael Kitces, chair of the Maryland Financial Planning Association doesn't believe it's a lasting decision.

"At some point down the road growth will look better ... and (firms) will turn to contributing again to employees. It's simply when businesses going through tough times, you do what you can to preserve the business and keep it viable."