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2008 Ends With Alarming Retirement Benefit Trends

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Wondering whether to keep throwing money into the black hole formerly known as your 401(k) account next year? Your employer might just make the decision easier by cutting back on matching contributions.

A survey by benefits consultant Watson Wyatt finds that five percent of companies already have reduced their contributions this year, and another seven percent expect to make cuts in 2009.

The cuts in 401(k) contributions are coming from cash-strapped companies facing sharp downturns in revenue as the recession deepens. The timing couldn't be worse, with retirement savers already facing decimated account balances from this year's stock market collapse.

The Watson Wyatt survey shows two other trends that are very negative for long-term retirement security:

-- Almost 60 percent of employees have moved their 401(k) or 403(b) investment mix out of equities, compared with 53 percent in October. That's almost always a bad move, since it constitutes selling at the low end of the market and reduces the opportunity to benefit when the market recovers.

-- The number of employees taking loans from 401(k) accounts jumped from 19 percent to 27 percent in the same period. No doubt, the trend reflects the growing stress on household finances, but 401(k) borrowing can have devastating impact on long-term retirement account growth.

Unlike traditional pensions, employers have the flexibility to stop or start matching 401(k) contributions as they like. It's a relatively obvious target for cuts in a severe economic crisis, when cash gets tight. Today, only one-third of all U.S. employers still offer traditional defined benefit (DB) retirement plans-that is, plans with specific cash payouts that are promised to employees at retirement.

The pain associated with steep portfolio declines has some retirement experts calling for a return to traditional guaranteed retirement benefits. The looming cutbacks in employer matches likely will turn up the volume on this debate.