If your employer has recently reduced 401k benefits, you may be asking how this may affect your retirement savings program and what to do next.
If I may say, the 401k is the most incredible wealth-building tool ever invented. One reason is employer matching. This is the process where the employer contributes to the employees 401k -conditioned on the employee first contributing.
Not only can the employee benefit from the company’s match, but the provisional feature is a big motivator for employees to save.
Unfortunately, today many companies are suspending their matching programs. According to the Plan Sponsor Council of America, almost 20% of businesses have placed these benefits on hold. Worse, 1% of companies have ended their 401k plans entirely!
Many employees have been affected because 401ks tend to be large plans that cover many workers.
Why Are So Many Employers Reducing Matching Contributions on 401k’s?
The prevailing reason is Coronavirus. The Government mandated shut down and stay at home orders have impacted many businesses. The extent of the downturn is comparable in many ways only to the Great Depression.
Now that most states are relaxing stay at home orders, things are improving. But many people are worried about what is coming next. Consumers are still reluctant to spend, and that means less revenue for companies.
When businesses must lower short term costs, one of the first traditionally cut is employer-sponsored benefits.
Can Employers Legally Suspend Matching Contributions?
Yes. Flexibility is part of the 401k's design. It is better to have benefit reductions than to have employee terminations or go out of business.
These suspensions are usually short term, or the plans may come out of compliance by becoming top-heavy.
The most important thing the employer can do is to notify employees of the change. If you have questions on your plan, see your HR Department for more information.
*If your employer participates in a safe harbor 401k plan, they must notify employees 90 days in advance of suspending contributions.
What Should You Do if Matching Contributions Are Suspended?
Maintain a great attitude and do not become discouraged with your company. These cuts, which likely are temporary, are a result of the pandemic. During hard times, a positive outlook goes a long way. The economy is cyclical, and good times always follow bad. Position yourself for the inevitable rebound by delivering excellent work performance.
Increase your employee deferral percentage. Are you able to raise your contribution amount to compensate for all or part of the matching decrease? Say the company was matching 3%, and you were contributing 3%. Can you increase your deferral to 6%? Then, upon reinstatement of the matching, you have built a good habit and perhaps can maintain a higher deferral going forward.
Meet with a financial planner for an hourly engagement. Review your entire situation, including assets, liabilities, spending, and portfolio allocations. Even a small improvement in your plan can make a big difference over time. A 2012 study found: "the more extensively households plan, the better prepared they are in saving, investing, and managing credit card debt."
Financial Planners are known for advising people to save and invest in stocks and bonds. However, I believe one of the best investments you can make is in yourself. After all, the first step to building retirement savings is productivity during the working years. Consider education that can enhance your career. Ideas include earning that extra certification or taking a class online.