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What to Do If Your Employer Cuts Its 401(k) Match Benefit

The stock market isn’t the only thing that might be beating up on your 401(k) retirement plan; many employers are cutting 401(k) plan matching benefits as a way to reign in expenses, the Wall Street Journal reports. What should you do if your employer pulls your matching benefit?

Many employers match employee 401(k) contributions up to a certain small percentage of your salary. For example, for every one percent of your salary you invest in a 401(k) (up to a maximum percentage), your employer might put in an additional half-percent. So if you saved six percent of your salary, your employer would pay you an additional 3% of your salary into your retirement plan.

Employer matching is a great incentive to invest in your 401(k), but it’s also an easy benefit for companies to cut when times get tight. If your employer stops matching contributions, don’t stop saving fore retirement! Employer matching is used as an incentive to get employees to save, but you should continue to do so even without it. If you can afford to, up your contributions to make up for the lost employer contribution. Or, you may consider switching your investments to a Roth IRA.

Switching to a Roth IRA

I recommend any eligible employee to take advantage of 401(k) plans—especially if your employer matches your contributions at all—because having the investments automatically withdrawn from your pay means you’ll never miss the money. If your employer stops matching your 401(k), however, a Roth IRA is actually a better retirement account because you can take withdrawals tax-free after retirement (your 401[k] contributions are tax-free now, but will be taxed when you withdraw them).

Although you can put $15,500 into your 401(k) in 2008, this year’s IRA contribution limit is $5,000. Keep that in mind and spread contributions between the two if you’ll be able to contribute more than the IRA limits.

Has your employer cut 401(k) matching because of the economy? Are they slashing any other benefits? What have you done?

About David Weliver

David Weliver is the founding editor of Money Under 30. He's a cited authority on personal finance and the unique money issues we face during our first two decades as adults. He lives in Maine with his wife and two children.

Comments

  1. My employer cut their 50% match effective July 1, 2008. I stopped contributing at that time since my husband and I are currently focusing on getting out of debt (one car loan and one installment loan) first. If my employer were to bring back the match, though, I would probably start up with contributions again.

  2. My employer stop their matching effective January 1, 2009. Should I put money in a Roth IRA or continue contributing to my employer plan. I will be in a lower tax rate in retirement.

  3. Well, maybe I shouldn’t have written about this. It just happened at my employer. I upped my contributions to make up for it and a little bit more.

    Joe, if you’ll be in a lower tax bracket at retirement, stick with the 401k. Roth’s really pay off if you are making less now and expect to be in a higher bracket in retirement because distributions in retirement are tax-free. Also, if you make more than $95k single or $150k married you can’t do a Roth.

  4. my husband has noticed that his employer has not contributed since the beginning of the year. this was a signed contract. they match my husbands . they didnt even tell him they stopped. is this legal?

  5. What if your employer only matches 6% with company stock? Do I take the money or invest it in funds that are diversified on an IRA?

  6. David:

    I’m curious…I’ve been doing a lot of reading on your sight and I LOVE it. I’m in the military, and we have what’s called the TSP which is our 401K equivalent…we do not get any type of a match, but if we’re stationed in a tax-free zone, we get tax exempt contribution benefits. I’m contributing off the top, since I don’t miss the money out of the paycheck when I don’t ever see it, but I also have an IRA that gets what’s left over at the end of the pay period. (needless to say, neither of them are ever close to getting maxed). However, when I am deployed, I send all that “bonus” money RIGHT to the retirement account, since I’m stuck somewhere with no bills or spending opportunities (bonus, tax exempt contributions).

    My question is…since there’s NO match, and never will be…should I take the 6K (for the new 2012 limits) and send that to my IRA FIRST, and then send what I can still afford to the TSP?