What Should I Do if My Employer No Longer Matches My 401(k) Contributions?

October 26, 2010

Since their introduction in the 1980s, 401(k) plans have become a mainstay for many people who are saving for retirement. Having a 401(k) account allows you to contribute money (in the form of a payroll deduction) to an individual account before taxes are paid on that money. The effect of this type of tax deferral is to increase the ability of your money to grow before you are required to pay taxes. In fact, since taxes are only due when funds are withdrawn from a 401(k) account, it is possible for your contributions to grow for many decades (with tax-deferred compounding) before you have to pay taxes.

Hers is some advice and considerations about what to do if your employer no longer provides a company match to your 401(k) account:

  • Recognizing the importance that many workers attach to 401(k)s, many employers (particularly large companies) have sought to attract and retain talented employees by making their 401(k) programs as desirable as possible. One way they have done this is by having their program administered by a financial company that provides the 401(k) members with the greatest number of investment choices.
  • Another way they have done this is by having what is known as a “matching” feature in their 401(k) program. These companies “match” a certain amount of their employees 401(k) contributions with additional money, usually up to some cap amount. For example, a company may match an employee’s contributions on a dollar-for-dollar basis, up to 3% or 5% of the employee’s salary. So if that employee has a $100,000 annual salary and contributes 3% ($3,000) to her 401(k) account, the employer will deposit an additional $3,000 to the account.
  • Some employers match at a reduced rate, so in the preceding example an employer with a 50% match would deposit $1,500 to the employee’s account. In either case, these benefits are extremely popular with employees because they amounted to “free money” – by committing to save $3,000 in a 401(k) that has a full employer match, the employee would have an account balance of $6,000 – effectively a 100% return on their investment. Financial advisors almost always advise clients to try to take full advantage of this 401(k) benefit if it is offered by their employer.
  • As the economy turned downward, however, many companies reduced or even eliminated the matching elements of their 401(k) plans. While some of these companies have fully or partially restored the matching elements of their program, many have not. What should you do if the option is no longer available at your employer?
  • If you were contributing the maximum allowable amount to your 401(k), and the previous matching amounts were generous, then losing the employer matching contributions might have a noticeable effect on your savings. From one perspective, losing the employer matching contribution is like losing part of your total contribution. If you work in an in-demand profession, inquire whether your employer can provide some other sort of additional compensation to mitigate the loss of 401(k) matching.
  • But if this is not realistic, you should continue saving as much as you can to your 401(k) anyway. 401(k) plans are one of the best ways for individuals to build wealth for their retirement, even if they do not have the benefit of matching employer contributions.

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