It’s not something you want to hear, but it has been happening all too often lately. Many companies are stopping (or suspending, as some may like to sugar coat it) the employer match of their employees’ 401k contributions.
I have been lucky, but I have several friends and relatives who have had this happen to them. The big question, aside from wondering when and if your employer will start the match back up, is what to do- and how to keep saving for retirement when what was likely your primary vehicle for doing so has now lost some of its luster in the form of a matching contribution.
The free money in the form of the match made the decision to invest in a 401k easy. Now, you might begin to wonder what your options are and what is the best thing to do.
Some of your options include the following:
Do nothing and keep contributing to your 401k – Continuing to make contributions into your 401k plan is probably a good idea. You may not be getting a match anymore, but by continuing to save through your retirement plan at work through automatic, tax-free (OK, really tax-deferred) contributions from your paycheck on a regular basis.
Consider diversifying your tax treatment and contribute to a Roth IRA- Another thing to consider is taking some or all of the money you currently contribute to your 401k and either opening a Roth IRA or increasing your contributions if you are able and not at the yearly maximum, which is $5000 for 2009. Especially if you don’t have a Roth IRA yet, you are diversifying the tax treatment of your future retirement income. Your 401k investments will be taxed in the future, when you take withdrawals, while with a Roth IRA, you will pay taxes now, but your withdrawals, including interest, will be tax-free.
Pay off debt- I’ve touched on this before and discussed whether I should stop 401k contributions to pay off debt. A main argument many made against it was that you are leaving money on the table if you bypass your employer’s 401k match. But what if there isn’t one anymore? I think it is something to consider, but each person needs to assess their situation personally. If you have credit card debt at 20% interest, it sounds like a pretty good idea, because that is a guaranteed 20% return. (Especially considering the stock market’s abysmal performance over the last year or so) A student loan at 3% doesn’t seem like a great idea. The important thing is to make sure you are funneling all of that money to the debt you are trying to pay off, and start your retirement contributions back up right away after you have it paid off.
The best thing to do is to probably stick with the status quo, and continue investing in your 401k. Because it is automatic and you have been making regular contributions, it may be a good way to make sure you keep saving for retirement. We are creatures of habit, after all.
Investing in a Roth IRA, especially if you don’t have one, can be a good idea to obtain some tax-diversification, but set that up for automatic withdrawals from your bank account so you don’t have to remember to make regular contributions.
Paying off debt could be an option and result in guaranteed returns, but you need to be careful to make sure the money is going in the right place, and to start saving for retirement again as soon as possible.
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Isn’t it more tax advantageous to invest in the Roth IRA than 401k, if you aren’t getting the match?
Since the money grows tax free in a Roth, and presumably you will be in a higher tax bracket (and taxes will be higher) when you retire, if you aren’t maxing out your Roth, it’s best to put the money there.
Timely post RC, My company just cut my 401(k) match… I look at it this way – I’d rather them cut my match than my job. And if killing the match keeps my job, then I’m happy with that.
-Nate
@Jason- You bring up a good point, and it certainly can be, but I think a lot of it depends on a person’s future situation income, taxes, etc.-which is hard to predict, in reality.
For example, you may be in a higher tax bracket right before you retire, but after you retire, if your house is paid off, don’t have kids in school anymore, etc., for example, you may not need to draw as much from your retirement as you were making in salary. The 401k has the advantage of being tax deferred now, so you don’t have to take out quite as much as you would with a post tax Roth IRA contribution. I do think the psychological benefit of pre-tax contributions and automatic deductions from your paycheck make it a good thing, especially for those who may not have the discipline or might not set up automatic contributions to a Roth IRA.
The Roth definitely has some advantages, since you get to choose where you invest instead of what you are limited to in your 401k. You will also not have to take automatic distributions from a Roth, as you would with a 401k.
I certainly think it is a very good idea at any rate and is probably the way to go. Maxing your Roth IRA and then putting whatever else you can into a 401k certainly is not a bad idea.
Thanks for the great comment!
RC – great points. It could probably go either way.
The ability to choose your investments in a Roth definitely is something to consider. My employer’s 401(k) — which they recently stopped contributing to, by the way — seems to only have funds with high fees, so my Roth w/Vanguard gives me way more flexibility.
@Nate: Totally agree with you on that one-sounds like you have the right attitude! There are certainly worse things that can happen besides your employer cutting the company match.
@Jason- I agree totally- with the limited investments that most 401k’s offer (especially if they have dropped the match!) you are probably way better off with the basically unlimited choices available if you invest on your own, as well as having full control over your retirement investments.