It’s another sad reflection of the coronavirus pandemic gripping our nation. Your employer has just axed the matching contribution to your 401(k) retirement plan. For the average employee that’s a loss of over $4,000 per year.
What to do now? Here’s answers to your most common questions:
What’s a typical 401(k) match, and how does it work?
Many employers sponsor a 401(k) retirement plan for employees. Employees can elect to defer part of their salary, so instead of receiving their entire paycheck and paying tax on it, they choose to direct a portion of their pay into a 401(k) investment account earmarked for their retirement. That money will grow tax-deferred until the employee ultimately elects to withdraw it in retirement.
But there’s an added bonus (literally!). Many employers “match” part or all of what the employees save. Using one common formula, an employer might match 100% of the first 3% of salary saved and 50% of the next 2% of salary. That’s a complicated way of saying that if you put in 5% of your salary, your employer will throw in another 4%. Altogether, your yearly savings add up to 9% of salary, and part of that money is a “freebie,” coming straight from your employer’s pockets.
So what’s the impact of the coronavirus pandemic on 401(k) accounts?
With coronavirus lockdowns and cutbacks, employers are under intense financial pressure to cut expenses. One of the ways they can do that is by suspending 401(k) matches to employee accounts.
During the 2008-2009 financial crisis, more than 200 American companies suspended or reduced their 401(k) matches, reports Chris Taylor for Money.com, citing data from the Boston-based Center for Retirement Research.
This crisis looks likely to cut even deeper, as certain industries like retail, hospitality and travel have been devastated by COVID-19.
“Roughly 12% of employers have suspended matching contributions and an additional 23% are planning to cut their match or are considering it,” relayed Sandra Block in Kiplinger last month.
Will the match start up again later if the economy rebounds?
That’s quite likely, but of course no one can predict how long it will take for the economy to return to normal.
Fidelity Investments, which manages 401(k) plans for many employers, reports some encouraging news. Almost one-half of all companies cutting their 401(k) match during the 2008-2009 recession moved to reinstate it within a year. Even more got back on board within two years.
What should I do if my match is cut?
Whatever happens to the match, do not stop your own contributions. If you are like most Americans, your 401(k) plan is the primary way you save for your own retirement. Most people don’t have a pension nowadays, and Social Security will contribute only a fraction of what you’ll need in retirement.
We tell our clients to plan on saving 15% of income every year if they want to be fully prepared for retirement. If you contribute 10% of your salary to your 401(k) and your employer throws in a 4% match, you’ll have it pretty much covered. But make no mistake. Your own savings are critical. The employer match is just the icing on the cake.
So here’s three good options if your employer suspends the match:
- Wait it out and keep contributing.There’s a good chance they’ll reinstate the match when business picks up again. Until then, you’ll stay on track by continuing your own contributions.
- Contribute even more to the 401(k) to make up for what they’re not putting in, if you can afford to do so. If prior to the pandemic, you set aside 10% of salary, and they added another 4%, you’ll need to contribute an additional 4% to replace what they used to pony up. Silver lining: you’ll get a nice break on your 2020 taxes and can buy more shares while many investments are on sale. Or, if your plan offers a Roth 401(k) option, add the extra 4% there. You won’t get an immediate tax break, but those tax-free additions will help out down the road, and you can eventually roll them to a Roth of your own.
- Save elsewhere – like in a Roth IRA or in your personal brokerage account – to make up the difference. Both are smart moves. Whatever you put in the Roth will grow forever tax-free, and investments in your personal account can take advantage of super-low capital gains tax rates and do double-duty if needed in an emergency.