|Contribute to 401(k) in tough times
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.