Five Things to Remember if You Lose Your 401(k) Match

A growing list of employers have reduced their matching contributions to workers' 401(k) accounts as they struggle to preserve cash in the recession. But here's how bad it's become: Even AARP has suspended its 401k match for the rest of 2009.

When the nation's most prominent defender of retirement security stops matching employee contributions, you know there's trouble in River City.

One-third of U.S. employers have reduced or eliminated their matching contributions to retirement accounts since the start of 2008, according to Spectrem Group, a retirement benefits consulting firm. Another 29 percent plan to do so this year, Spectrem reports.

Experts hesitate to predict whether the trend is temporary or marks a permanent change in employer behavior. But let's not lose perspective. Even if your employer reduces or eliminates matching contributions, it's important to have a plan for retirement saving -- and stick to it, to the extent possible.

At the same time, a reduction or loss of employer matching contribution should prompt some reevaluation of your plan. I spoke with a range of experts on retirement saving over the past few weeks about this disturbing trend, and broke it down to the five most important things to consider if you find yourself matchless.

1. Stay positive. Don't take your employer's decision to cut back as a signal that you should, too. "People do take signals from their employers on things like this," says Steve Vernon, a financial planner and founder of Rest of Life Communications. "Your employer's decision to preserve cash has nothing to do with your retirement saving strategy."

2. Can you still hit your target? Mutual fund giant T. Rowe Price advises retirement savers to try to put away 15 percent of their total income each year. If your employer's match amounted to 3 percent of that total, examine whether you're in a position to make up the difference -- inside your 401(k) or using other retirement savings vehicles.

3. Traditional or Roth IRA? If your employer's match has been reduced -- rather than eliminated -- it makes sense to continue contributing to the level of your match. Or, if you're married, make sure your spouse is contributing enough to get the full employer match, suggests Scott Holsopple, president of Smart401k, a web-based retirement plan investment advisor.

Beyond that, consider using a Roth IRA to hit the rest of your annual target. Unlike a traditional IRA, you can't contribute pre-tax dollars to a Roth. Instead, you pay the taxes upfront in return for much greater flexibility in withdrawals in retirement. There are income eligibility limits but most U.S. households qualify under the current rules.

4. Auto-escalate. If you are sticking with an unmatched 401(k) but economic hardship makes it impossible to make up the entire difference right away, check to see if your employer offers an automatic contribution escalation, which lets you increase our contributions in pre-set increments of 1 to 2 percentage points annually.

5. Keep paying attention. The economic crisis has served as a wakeup call for millions of Americans who haven't paid much attention to planning their retirement. "The level of individuals' involvement and engagement with retirement planning is really rising," says Catherine Miller, vice president of 401(k) education at Charles Schwab. Even if your employer is cutting the match, a growing number are offering advice, services and tools to help you make informed decisions.

I've posted more details on 401(k) matches, along with decision-making tools, over at RetirementRevised.com.

Comments

[TryToBeFlexible]

So, T Row Price wants everyone to put 15% of their income into mutual funds. So they can siphon off billions/trillions in fees, before the value of the stocks fall to 50%. Yeah, that's the ticket. And, you can't get the money back out unless you die, or retire, or take a huge penalty. That is super!

[Aaror]

If your employer cuts your match to zero, see if you can move your money from employer controlled 401K (with a kickback to your employer) into IRA's controlled by you! Then read the advice of Dan Solin (on huffpost business pages) and put your money into low cost index funds.
Even if you can't move what is in there, if your employer is not helping, stop putting your money in a 401K and put it in an IRA, you have more control over your money.

[AmericanFool]

The prior comment goes a bit overboard. There are plenty of reasons not to invest in some 401K's, but I'm thankful to have mine, since I have no pension, and who knows what will happen with social security. An IRA is probably a better place to put your money, if you have no match, but after that the 401K is a pretty good deal if your fees are reasonable (and if their not, Vanguard or Fidelity are pretty good places to invest.) I agree a downsizing of the American lifestyle looks inescapable... even as the government bails out some companies, and offers stimulus to others, they all continue to outsource labor. Ironically enough, the only defence against that (other than gov't interference and it's usual host of attendent unintended consequences) is innovation, and after that, high energy prices. When Fuel is 6x what it costs now, producing goods in China won't be such a huge economic advantage. Even so, labor arbitrage is unavoidable, and will likely drive decades of dislocatioin.

[Aaror]

Actually, another defense against outsourcing is local labor being cheaper than foreign labor.
With US wages stagnant (and our buying power decreasing because of inflation) and chinese labor costs going up, we may see a trade deficit reduction sooner than you think.
The down side of that is it will come on the back of lower real wages, we will be poorer, but employed.

[cylindar]

401's are a thing of the past. The only option anyone has at the moment is to actually try to save money. This however will be impossible for most people. Services and goods have been overpriced for a while, just as home prices have. Thus saving money will not be possible because one has to pay for the daily bread so to speak. The real facts are that there is no such thing as a realistic retirement plan available for most people. Anyone who tries to sell 401's at this moment in time is a crook. There is no such thing as a secure retirment option available for anyone at this moment in time. Americans are in for a downsizing just like in the 50's. The party is over America, get used to it. The economy is a disaster and this makes any retirement planning a poke in the dark at the moment.