Your Financial Plan: Transition & Retirement Planning

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

Your retirement plans can hit a serious speed bump if your employer cuts back on 401(k) matches. Consider these strategies to minimize the disruption.

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. Here are five key 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.”

And whatever else you do, don’t use the reduction as an excuse to cash out. That’s a bad habit employed by far too many retirement savers; for example, 45 percent of employees cash out their 401(k) plans when they leave a job, according to Hewitt Associates, the benefits consulting firm. Under the law, withdrawals prior to the eligibility age (59) means you’ll forfeit 20 percent or more of your account value in federal taxes and another 10 percent in early withdrawal penalties.

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.

“Your employer’s reason for cutting back is financial,” says Stuart Ritter, a financial planner in T. Rowe Price’s Financial Planning Services Group. ” But you will still need to save the same amount to maintain your lifestyle in retirement.”

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.

Some employers offer Roth 401(k) accounts, and that’s a good option, Ritter says. “It’s simpler to use and there are no limits on income eligibility.” T. Rowe Price’s analysis suggests most investors under age 50 will have more income in retirement by shifting unmatched retirement dollars to a Roth.

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.

Hewitt Associates, the employee benefits consulting firm, reports that 38 percent of companies were offering online, third party investment advisory services to employees in 2008 and another 43 percent planned to add them in 2009. And 20 percent now offer managed accounts, which allow employees to delegate the overall management of their accounts to an outside professional.

Resources

T. Rowe Price’s Stuart Ritter offers a handy chart as a decision-making tool to help you decide whether to invest dollars in a traditional IRA or Roth account. Each cell indicates the plus/minus of spendable income in retirement, assuming different years of withdrawal and declines in your tax rate during retirement. The white cells represent scenarios in which you’ll benefit with a Roth compared with a traditional IRA. The second page of the file offers information on how to use an online IRA calculator at T. Rowe Price’s website.

–The Pension Rights Center maintains a page listing employers that have reduced or eliminated 401(k) matches, with links to news articles about their decisions
 

© 2008 Tribune Media Services Inc.