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Contribute to 401(k) in tough times

It's not easy maintaining 401(k) contributions in a bear market. Even if you have a fairly diversified portfolio, your investments probably lost 13 percent of their value in 2002, according to a study by mutual fund giant Vanguard.

Now, suppose you're one of the thousands of employees working for one of the companies that has suspended its 401(k) match. Ford, Daimler-Chrysler, Goodyear and Charles Schwab are some of the larger companies blaming suspension of the company match on the battered economy.

"Schwab cutting it is probably what woke most people up," says Rick Meigs, president of "Chrysler struggling is no big deal, or Ford, but Schwab! That's a company whose very livelihood is dependent on 401(k) plans. What kind of message does that send?"

The lousy economy and dwindling 401(k) account balances can push some employees to quit contributing to their 401(k)s. But suspending the company match will turn off a lot of workers.

"Historically, every survey we've done the primary motivator is the match," says Rich Koski of Buck Consultants. "The participation in a non-match 401(k) plan rarely exceeds half your eligible population. If you drop the match, you see people dropping out."

A Buck survey indicates that employee participation in 401(k) plans dropped from 77 percent in 1999 to 73 percent in 2002.

Why they're dropping out
Not all of that can be attributed to employees quitting the plan because there's no match. But if the economy is bad and a company has to suspend its match, it's fair to assume that employees may be having a tough time paying bills and could quit contributing to their retirement plans, so they have more money for current expenses.

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But unless you're desperate, stopping contributions to a 401(k) is a bad idea, especially if it's just because you're not getting a match, says Chris Cooper, a certified financial planner in Toledo, Ohio.

"They're not getting any younger, and we live longer. We will need more money in our retirement than any generation in history. It won't be uncommon for baby boomers to hit 100, and they'll need money to live, eat and be cared for.

"Secondly, they miss the tax deferral, which is a huge benefit. If they're in the 27 percent tax bracket and they put $10,000 in the plan, it only costs them $7,300 of actual money that they would take home. So the tax deferral alone is an instant 27 percent return on their money."

Tech Data, an information technology company headquartered in Clearwater, Fla., has 2,700 employees in the United States. The company suspended its match in April 2002.

"It wasn't the most positive news," says compensation and benefits director David Francis. "The company was trying to preserve jobs. Anytime you have to reduce costs that's always one of the options the company goes through. It was a very hard choice, but immediately, the commitment was to reinstate it as soon as possible."

Tech Data made good on its promise and reinstated the match early in 2003. But while it was suspended, the company encouraged employees to continue their contributions.

"We certainly have the position that the 401(k) is a good financial decision for all of us whether there's a match or not. We have a third-party administrator who we bring in every year to answer basic questions. They gave the group the same general message about the strength of contributing," Francis says.

Reasons for cutting the match
Like Tech Data, which said it suspended its match to save jobs, companies that cut the match say they rarely do it without good reason.

Rich Koski calls it a "gut-wrenching" decision.

"A lot of companies view it as breaking an implicit contract with their employees, especially when they don't have a defined benefit plan and everything is in the 401(k)."

Some companies, such as Ford, have generous defined benefit plans and are obligated to fund them. When times are tough, the voluntary match on the 401(k) is sacrificed in favor of the mandatory pension plan contributions.

The rising cost of health benefits is another reason some companies drop the match. It's also a reason some employees stop contributing.

"Many companies are having to increase the co-pays in health programs. Employees have to spend a larger portion of their income to keep their health insurance. That's a higher priority. There's competition across benefit programs at the employer level and there's the same competition at employee levels," according to Dallas Salisbury of the Employee Benefits Research Institute.

Apparently, some financial planners encourage their clients to only contribute sufficient dollars to capture the match. The theory is that the employee should invest any additional money in an IRA, which could give the employee greater investment flexibility. That could encourage employees, whose match is suspended, to stop contributions.

Chris Cooper advises workers to be wary of that kind of advice; the planner may be thinking more about the commission he or she will get for selling an IRA. He advises maxing out your 401(k) contributions before funding an IRA.

If you want to save as much as possible for retirement, keep socking money away in the 401(k), regardless of the economy or whether you get a company match. Presumably, your contribution is buying a greater number of shares when share prices are low. That will pay off when the economy comes out of its slump and fund prices rise.

If you really can't stand seeing the bottom line decline quarter after quarter, consider putting a greater portion of new contributions into more conservative investments such as money markets. Bonds can be risky right now because their share prices may be close to peaking.

Unless you're independently wealthy or have some other options to fund your retirement, you'll need a fat 401(k). Pretax contributions are the fastest route to building that kind of wealth.

-- Posted: May 20, 2004

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