As we live and breathe in an economic carnage unleashed by the pandemic and the war in Ukraine, lots of companies have cut not only jobs but also lots of benefits, including the company match on your 401(k) retirement plans.
Even if you are unemployed, you might still have to deal with reduced benefits for quite some time, as companies seem to regain their financial footing. “As more employers are suspending their retirement benefits and company matches, consumers are still facing bigger financial responsibilities for how to save for their future and act in their best interest” according to Pam Krueger, CEO of Wealthramp in the San Francisco area.
Even if experts would recommend saving as much as you possibly can in your 401(k) plan, you might still want to consider various different options in these “special” times, such as not contributing at all. Here are a couple of things we think are worth knowing if you lose your 401(k) employer match, and what is there to do:
How 401(k) matching contributions actually work
The 401(k) plan is definitely one of the most popular retirement savings programs in the entire U.S., and the company match might be one of the easiest ways for many workers to rapidly accumulate a couple of bucks for their retirement funds.
Workers can contribute right from their paychecks, and the company will contribute additional funds, usually as much as 3 to 5 percent of a worker’s salary every year, depending on the chosen plan.
There are some employers who require that matching contributions vest in time, generally in three to four years. Usually each year a portion of the employer match vets, which makes you the legal owner of it. So you might not have a full claim on that matching contribution until a few years have gone by.
Assess your financial picture
Well, it’s definitely a shame if your company decides to cut its matching funds. However, if it has to, you might want to do a couple of things first! You will have to determine why the company decided to cut the match and its overall financial health and then assess your own financial health.
Just by looking at these two factors, you will get a better understanding of what kinds of actions will fit you best. According to Nicholas Stuller, founder of “MyPerfectFinancialAdvisor” in West Cornwall, Connecticut, “you have to understand if your company is healthy enough to survive such a period”. Is the company in big financial trouble that’s unlikely to recover from, or is the problem even more short-term in nature?
Also, you might want to take a look at your own personal finances. I mean, could you muddle through if one spouse would lose a job? Or do you have enough money stashed away in a super emergency fund, that’s completely risk-free and easy to access?
What actions you can take
It depends on your assessment. If you start from there, you’ll see if you have various courses of action. It’s worth mentioning that if you keep contributing to your retirement plan, it won’t necessarily turn out to be the best option.
It’s also critical to make it through to the other side of tough times, without destroying your entire financial health. Taking on leads of debt right in the middle of a downturn might eventually hurt your long-term future plans more than not saving for a couple of years.
Plus, if your company suddenly decided not to match funds, there’s nothing you can really do.
When your company is in a bad financial shape
If your company isn’t in steady hands right now, Stuller would recommend you to look to shore up your OWN personal financial and even career situation, before even worrying about retirement. One of the first options is to get your emergency fund in order, now, while you still can.
Experts would recommend having a minimum of six months of expenses on hand, but in more difficult times, having more isn’t going to hurt you. You might always return to contributing to your other retirement accounts later.
According to Laura Hearn, CFP, a wealth advisor at RMB Capital in Chicago, “if you’re struggling already to make ends meet or you’re a bit unsure about the security of your job, consider putting more cash into liquid savings account instead.
Why? Because if you’ll increase the savings to your 401(k) and find yourself a bit tight on cash, tapping into your 401(k) savings might cost you a bit.”
When your company seems to be relatively stable and healthy
However, if your company seems to be pretty stable, then you might have more options. But remember, even then you might still want to shore up your finances, right before you commit to even more retirement savings.
From there, you might have a few avenues you could consider. “If [your company] is still healthy, then would you say you could afford to personally make up the match and keep on saving? If yes, then consider doing it.” as Stuller advised. “Consider paring back some other expenses to re-allocate those funds to savings if you can.” Even so, without the match, workers are still missing out on one of the most crucial benefits of a workplace retirement plan.
It’s true, there are other reasons to keep on staying in your employer’s plan, like a good selection of funds and the convenience of having money invested right from your paycheck.
As an alternative, you could roll that 401(k) money into an IRA, either it’s traditional or Roth IRA, but you might want to understand the whole picture of such a decision.
But let’s be honest: there are other options to your company’s 401(k) plan, and even as a last resort, a taxable brokerage account could still be a good thing if you need penalty-free access to that money.
Should you really contribute to your 401(k)?
If your job and personal finances look pretty stable, then keep on adding to those retirement savings! In fact, some experts would always recommend choosing retirement savings.
“The most essential step consumers might take is to keep on contributing to their retirement plan, as contributions are automated and therefore might help you invest more systematically. Plus, there’s the benefit of tax deferral on your 401(k) contributions” according to Krueger.
If you keep your commitment to your retirement account, you will soon see it as untouchable money that must be kept for your future, which allows the money to compound tax-free for many years.
What will happen to your 401(k) if you aren’t vested?
When it comes to 401(k) matching, it is extremely important to be aware of how vesting works exactly. In most cases, the match might not be yours right away. Even if your contributions always belong to you, the money given by your employer might be required to vest before you will be able to claim ownership.
And in some cases, that happens after many years. So during this amount of time, you will have to remain an employee of the company, until the match amount reaches the required vesting period. Otherwise, you will do nothing but forfeit any matching funds that are unvested.
To get more info on 401(k) plans, we suggest going to the IRS website.
If you enjoyed reading this article, we also recommend reading: Stop Believing These Weird 10 Retirement Myths – Here’s Why