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What to Do If Your Company Suspends Its 401(k) Match

In a downturn, your employer may look to tighten the purse strings. But that doesn’t necessarily mean you have to.

By Megan Ryan | April 24, 2020

Worried woman

Companies hit especially hard by the COVID-19 pandemic are taking drastic measures to stay afloat, including cost savings that can have a direct impact on employees.

One such measure: suspending the employer match on employee 401(k) retirement accounts.

“As companies begin to anticipate hits to their bottom line, they will typically do all they can to avoid laying employees off or impacting their compensation,” said Kelley Weil, chief human resource officer at BOK Financial.

Before taking that drastic step, Weil said executives will typically impose limits on expenses, such as entertainment and travel (check – little-to-no travel right now), alternatives to hiring new employees (check – limited hiring in many industries right now), reviewing vendor contracts and rates, and even renegotiating medical plans.

Plans Sponsor Council of America (PSCA) surveyed retirement plan sponsors with 1,000 or more participants last week, and found that 21.7 percent of those surveyed either have suspended matches or are considering it. The group says this rate is similar to the Great Recession of 2008-2009.

“While the current situation is very different, our survey results suggest approximately the same numbers. Whether they hold largely depends on the length and ultimate severity of the current crisis, especially as it relates to small businesses,” said Hattie Greenan, director of research at PSCA.

PSCA also reports that nearly half of the surveyed plan sponsors are still weighing their options as companies seek ways to meet business needs while considering the impact on their employees’ financial futures.

“A competitive 401(k) match is a really important employee benefit,” said Weil. “It’s one of the very first things individuals look for when evaluating a prospective employer’s benefits package.”

The average employer 401(k) match in “normal times” in the U.S. is 4.3 percent of an employee’s pay, with the most common match being 50 cents on the dollar, up to 6 percent of the employee’s pay, according to Investopedia.

“The general rule is to contribute at least what your company will match since it’s free money and can add up to a significant contribution toward your retirement goals,” said Brandy Marion, institutional wealth education and training manager at BOK Financial. “But, there are additional factors to consider in times of crisis.”

If your company decides to eliminate or reduce the match to employee 401(k)s, Marion suggested the following:

Think about your immediate and long-term needs.

Start by reviewing your budget to look for ways to trim your spending, Marion said. Then, use a retirement calculator to review your contributions without the match and what it will take to stay on track toward your retirement goals.

Only suspend if necessary.

“If you’re in a serious pinch and need the extra cash, go ahead and reduce or suspend your contributions, but keep your retirement goals in view,” Marion recommends.

If you have to suspend your contributions, commit to restarting when the employer match comes back online, which almost always happens.

Consider raising your contribution.

“If you’re getting the same paycheck and everything else is the same, look at your goals and see if you could even raise your contribution one or two percent to make up for the missing match,” Marion said. “Once the employer match starts up again, consider maintaining the higher individual contribution.”

Marion said people often confuse the maximum contribution they can make with the rate their employer matches. The 2020 annual contribution limit is $19,500 for pre-tax or Roth contributions, plus an extra $6,500 for employees who will be older than 50 by the end of the year.

“You’re not going to be upset if you have more money at retirement,” she said. “If you raised your contribution and can live with it, leave it alone.”

Remember the tax benefits.

Every dollar you put into your 401(k) gives you a tax deduction, or with a Roth IRA, a tax-free distribution down the road. Those tax benefits don’t disappear just because the employer match went away.

“It’s important to stay the course during times like these,” Marion said. “If changes occur with your company match, keep these options in mind while reassessing your risk tolerance and focusing on those long-term retirement goals.”