What to Do If Your Employer Pauses 401 (K) Compliance Searches
We’ve reached the point of the coronavirus pandemic where if you can keep your job and work without leaving the safety and comfort of your home, you probably feel pretty lucky.
But here’s an interesting point to consider: What if your company hits the pause button in your 401 (k) program?
Matching company retirement contributions can be an important benefit when considering a job, and matching can significantly add value to your bird’s egg over time. Last year, the average hit rate was 4.7%, according to Fidelity.
Amtrak, Marriott and Macy’s are just a few of the companies that have suspended their comparison programs in light of the ever-changing economic impact of the coronavirus.
“Employers are looking for ways to save on costs, as they did in 2008-2009 when the last financial crisis hit,” explained Sofia Bera, CFP and founder of Gen Y Planning .
If your employer shortens the matching or puts it on hold for a few months, that’s not cause for alarm. “Employers generally don’t cut related contributions without serious foresight,” said Brandon Renfroe , CFP and East Texas Baptist University finance professor. “It’s not ideal, but you have more time to adjust to changing retirement dates than next week’s budget change, no matter how far from retirement.”
If your company is going through this change, it might be time to strategically think about your retirement account.
Most important, Bera said, don’t stop making contributions to your retirement account if you can still save money. “I started financial planning in 2007 and [people] who continued to contribute to their 401 (k) saw their accounts recover much faster,” she explained. Since the markets were so bad at the time, you could buy investments at a deep discount . When the market recovered, account balances rose at the same time.
If you are eligible for a Roth IRA, Bera said you can reroute your 401 (k) fee there. “You can easily open it at a discount brokerage firm,” she said. Although your Roth IRA contributions are post-tax (as opposed to 401 (k) contributions, which are made before taxes), you will not have to pay income tax on Roth IRA funds when you withdraw them in the future.
For some people, this may even be a good time to increase their contribution, even without this employer. “If your job is stable and you are saving money by not eating out in restaurants or traveling right now, this may be a great time to increase your investment,” Bera said. “Since the market is in decline, this can be a great time to invest if you have a long time horizon.” Plus, these pre-tax deductions will lower your tax bill in 2020, she noted.
Renfro has also called for an increase in your contributions if you can. “If you cut your budget now to increase your savings, you will be doing a huge service to your retirement,” he said. “You may even find that your new budget is more manageable than you thought.” Then, when and if your employer returns their matching program, you will be in an even better position to maximize your compliance and overall savings rate.
When the economy improves, your employer will most likely announce that the coincidence rate has been restored. If not, then Renfro says it’s worth talking about. “You don’t have to get into confrontation, but encourage colleagues to mention it,” he advised. “Employers know that matching contributions are a significant part of overall compensation and that they must be competitive to retain good employees.”