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What Should You Do if Your 401(k) Match Ends?

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What Should You Do if Your 401(k) Match Ends?

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The economic fallout from the pandemic has some companies suspending their 401(k) match for employees to save money.

For employees, this comes as a double whammy – not only did their retirement savings take a hit in the first quarter, but they're also losing the bonus of their company's contributions.

To put things in perspective, take a look at some of the 401(k) news reports detailing these suspensions: In April, a survey from the Plan Sponsor Council of America – which represents employee benefit plan sponsors – found that more than 20% of large organizations indicated they’re suspending matching contributions. According to a June report from the Center for Retirement Research, nearly 50 companies have suspended their 401(k) matches. This includes big businesses such as Best Buy, Dell Technologies and Quest Diagnostics.

These matching 401(k) contributions are an employee perk. Some workers only contribute enough of their paycheck to their individual plans required to get the match, which typically is a 50% match on 6% of the employee's salary, or about 3% of the employee's earnings.

Financial experts say whether an employee should still contribute to their 401(k) while their employer suspends matching depends on a few factors, including the plan's cost and offerings and a worker's own financial position. Before you discontinue your contributions, keep these points in mind:

  • The pros of continuing your employee 401(k) contributions
  • Reasons to stop contributing to your 401(k)
  • Other considerations for 401(k) savings

Why you should continue your employee 401(k) contributions

Catherine Collinson, CEO and president of Transamerica Institute and Transamerica Center for Retirement Studies, says although an employer match is an added incentive for people to save for retirement, even without an employer match, funding these accounts with payroll deductions make it a convenient and often cost-effective way to save for retirement.

"Saving in a plan affords the individual the opportunity to save consistently over time, as well as having access to all of the additional resources available through the plan and the plan provider," she says.

Chad Parks, founder and CEO of Ubiquity Retirement + Savings, which offers retirement plans for small businesses, says if you're contributing to a 401(k) plan, you've already gone through the hard work of making the budgeting decisions and setting up the plan. If you can afford to continue saving, "there's no reason to stop," he says.

Parks points out   if your account is a traditional 401(k), you're "getting an immediate government match in the immediate tax savings that you're not sending to the IRS."

Parks explains   for every $1,000 saved in a qualified plan such as a traditional 401(k), about 20 to 25% is sheltered from taxes, depending on your tax bracket. "So, you're only coming up with $750 or $800 to save $1,000," he says.

You should also think about the long-term effects of consistent saving on total retirement income, says Joseph Polakovic, owner and CEO of Castle West Financial. With fewer people having pensions these days, most workers will only have Social Security and their 401(k). Especially for younger people, contributing to a 401(k) – even without an employee match – allows that money to grow with compounded interest over the years.

Keep in mind, suspensions may also be temporary. Just look at recent history. Brian Walsh, financial advisor at Walsh & Nicholson Financial Group, points out   about 18% of companies suspended 401(k) matches in 2008, but the vast majority of them reinstated those in a few years.

Reasons to stop contributing to your 401(k)

Saving in a 401(k) is great for the long term, but don't neglect short-term needs. If you don't have an emergency fund to cover 3 to 6 months of expenses, Collinson says you can redirect some of that 401(k) money to building up that cushion.

"If the individual lacks a reserve of emergency savings and that puts them in a position where there's a high probability they would have to take a loan or an early withdrawal (from their plan), that could be counterproductive," she says.

Most plans allow participants to take loans, but those have to be paid back. The CARES Act has made it easier to take some loans from plans by waiving the 10% penalty for early withdrawals. Again, those loans still need to be repaid. If you lose your job or leave it, then the loan needs to be repaid quickly.

If you or someone in your household were affected employment-wise as a result of the pandemic, now’s the time to assess how much you can realistically afford to save, Collinson adds. So, suspending your contributions at this time might actually make sense.

Other considerations for 401(k) savings

If your finances haven't been affected by the pandemic, and if the suspension ends up being permanent, Walsh says to review your investment strategy.

Look at the fees in the plan. Older 401(k) plans sometimes have higher fees, so you may be better off finding a better investment plan elsewhere such as an individual retirement account. A Roth IRA, which isn’t a tax-sheltered plan but allows earnings to grow tax-free, is a solid option.

Look at the plan's holdings. Is there a diverse selection or are the choices limited? "One of the cons of a 401(k) is the cost and limits. You can pay 25 basis points for a Vanguard index fund in your plan, but maybe 4 basis points for the same fund outside your plan," he adds.

One of the benefits of a 401(k) is the amount of money you can save. But if you're only saving enough to get the match, those contribution limits may not mean much. Again, Walsh says another idea is to save in a Roth IRA, which he recommends for younger investors. Like a Roth 401(k), these plans are funded with after-tax dollars, but the growth is tax-free. "Typically, younger people are in a lower tax bracket, so it makes sense," he says.

People who are closer to retirement and haven't built up a cash cushion for their golden years may also want to consider redirecting their contributions. "One thing we always advise our clients near retirement to do is to save at least two years of income in cash," Walsh says.