The current economic crisis has made several companies suspend their 401(k) match for employees to save money. A survey by the Plan Sponsor Council of America, which represents employee benefit plan sponsors, found that over 20% of large organizations have indicated that they will suspend their matching contribution. A similar survey by the Center for Retirement Research found that over 50 companies have suspended their 401(k) matches, including large organizations like Dell Technologies and Best Buy.
For employees, this comes as a big hit. Their investment was affected by the market downturn, but they are also now losing the bonus from their employers. Most employees only contribute enough from their paycheck to their retirement plan to get the 401(k) matches.
However, despite the 401(k)-match suspension, financial experts say employees should continue contributing to their 401(k) accounts. Here’s why.
Why It’s important to Keep Contributing To Your 401(K) Account
The CEO of Transamerica Institute and Transamerica Center for Research Studies Catherine Collinson says funding their 401(k) account provides an effective way to save for retirement, even without the matching. This was also the view of Chad Parks, CEO of Ubiquity Retirement + Savings, who said employees should continue contributing to 401(k) if they can afford it. After all, they have already done the budgeting and set up a plan. He further stated that if your 401(k) is traditional, you are getting some government match for the taxes you are not sending to the IRS.
For every $1,000 saved, about 20% to 25% is sheltered from taxes, depending on your tax bracket.
Joseph Polakovic, owner and CEO of Castle West Financial, said employees should think of the long-term effects of consistent saving on their retirement. While Brian Walsh, a financial advisor at Walsh & Nicholson Financial Group, hinted that companies’ 401(k) match suspension might be temporary. He said several companies did the same in 2008, but many of them reinstated those years later.
When You Should Stop Contributing To Your 401(k)
While saving for retirement is great, it’s essential not to neglect your immediate needs. For instance, if you don’t have an emergency fund that’s up to three to six months of expenses, you should consider redirecting your money there.
The emergency fund acts as a hedge if you lose your job or are incapable of working for a period. If you’re tight on cash, now is the right time to reassess how much you can save to 401(k), so you don’t end up taking a loan or making an early withdrawal from your plan.
Other Considerations for 401(k) Savings
If the 401(k)-match suspension ends up being permanent, you should review your investment strategy. Compare the fees of your current plan to that of other individual plans. A Roth IRA is a reliable option.
Also, look at the plan’s holdings. How diverse is the selection? One con of 401(k) accounts is the limits. You may be paying 20 basis points for a Vanguard index fund in your plan, while the same plan may be five basis points outside your plan.
One advantage of 401(k), however, is that it allows you to save more. But if you are only saving enough to get the 401(k) matches, you should consider Roth 401(k) plans, which offer tax-free growth.
Lastly, for people who are close to retirement, but haven’t built up a sufficient retirement fund, Walsh advises that they save at least two years’ worth of income in cash.
