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What Should You Do If Your Employer Has Suspended Your 401k Match?

401k cut

With the social distancing and shelter-in-place orders issued to combat the coronavirus pandemic taking a toll on their revenue and profits, many companies today are scaling back their matches to employees’ 401(k) plans. 

This is similar to what happened during the financial crisis and Great Recession a decade ago when more than 200 U.S. companies reduced or suspended their 401(k) matches. This ended up affecting about 5 percent of all plan participants, according to the Center for Retirement Research.

While most of these businesses eventually reinstated their matches, the reductions or suspensions of matches were costly to plan participants. Employers that match 401(k) plan contributions add an average of $4,040 per participant each year, according to Fidelity. If this match was suspended for just one year, it could result in lost retirement savings of more than $30,000 after 30 years, assuming a 7% annual return (compounded annually).

Strategies to Consider

So what should you do if your employer has reduced or suspended its 401(k) match? Here are a few suggestions:

  1. Boost your own contributions to make up the difference. This strategy could make sense if your employment situation is stable and you have enough financial margin in your life. For example, if you contribute $300 a month to your 401(k) plan and your employer normally offers a 50 percent match (or $150 a month) but has suspended this for now, can you temporarily bump up your own contribution to $450? By doing so, you won’t lose any ground when it comes to meeting your retirement savings goals.

You might have to cut some financial corners elsewhere to make this happen. For example, if you usually spend $75 once a week eating out at a restaurant, you could free up the extra $150 by cutting this back to every other week.

  1. Prioritize your current financial needs. If your employment situation is tenuous, however, and you have little financial margin, you might be better off holding your contribution level steady. After all, it’s more important to stay current on your existing financial obligations like your mortgage, car payment and insurance than to boost retirement plan contributions during uncertain economic times.

In fact, this might be a good time to beef up your emergency savings or start an emergency savings fund if you don’t have one. This could help you be better prepared financially the next time a financial crisis strikes.

  1. Consider opening another retirement account. Participating in a 401(k) plan is practically a no-brainer if your employer offers a match, but a suspension of the match changes the equation. In this situation, it might make sense to look at other types of retirement accounts to supplement your 401(k).

For example, with a Roth IRA, you contribute after-tax dollars, which means you don’t get a current tax benefit. But future withdrawals are made tax-free. This could result in greater financial flexibility and more income when you need it most in retirement.

Back to Normal?

The good news is that it’s likely many employers will reinstitute 401(k) matches when the coronavirus pandemic is over and the financial crisis passes. About three-quarters of businesses that reduced or suspended 401(k) matches during the Great Recession had reinstated them within a couple of years.

Of course, no one knows when the pandemic and crisis will end and things will get back (or close) to normal. In the meantime, think about whether one or more of these strategies could be appropriate for your current financial situation.

Please give us a call if you would like to discuss retirement planning strategies in more detail.

The commentary is limited to the dissemination of general information pertaining to Frontier Wealth Management, LLC’s (“Frontier”) investment advisory services. This information should not be used or construed as an offer to sell, a solicitation of an offer to buy or a recommendation for any security, market sector or investment strategy. There is no guarantee that the information supplied is accurate or complete. Frontier is not responsible for any errors or omissions, and provides no warranties with regards to the results obtained from the use of the information. Nothing in this document is intended to provide any legal, accounting or tax advice and Frontier does not provide such advice. This information is subject to change without notice and should not be construed as a recommendation or investment advice. You should consult an attorney, accountant or tax professional regarding your specific legal or tax situation.