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