|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."