retirement

What to do if you lose your 401(k) match

Federal Express, Sears, UPS, Eastman Kodak, Hewlett-Packard. The list of major employers that have halted their 401(k) match continues to grow as corporate profits hit the skids, forcing thousands of retirement savers to fend for themselves -- at least until the economy recovers.

In many ways, they're the lucky ones. A growing number of U.S. workers at small- to midsized firms, which suffer the effects of a downturn more severely, have watched their defined contribution plans terminate altogether as their employers go belly up or get bought out.

It seems that every day companies are retreating from their 401(k) commitments. More than 120 companies have announced a suspension of their match within the past nine months, according to the Pension Rights Center.

"Since the fall, a whole slew of corporations have suspended their 401(k) match," says Dan Muldoon, research associate for the Center for Retirement Research at Boston College. "We experienced the same situation during the last recession between 2000 and 2002. It's a way to trim the budget without having to lay people off, so it's seen as a lesser of two evils."

When your employer backtracks ...
  • The impact is huge.
  • Create multilayer savings plans.
  • Know your options when a plan terminates.
  • Save smarter.

Most of the companies that instituted a 401(k) freeze say they plan to resume their match when their bottom lines improve.

But those affected -- including some 18,000 employees who work for Salt Lake City-based health system Intermountain Healthcare -- are facing tough decisions over where to direct new contributions and how to keep their long-term savings plans on track.

The impact is huge

"It's hard to immediately process the effect of (a 401(k) freeze) when it happens in the present, but over 10, 20 or 30 years it can really have a big impact," Muldoon says.

Indeed, the loss of employer contributions to a 401(k) has far greater implications on one's nest egg than most retirement savers think, says Muldoon.

For example, if your employer matched 50 percent of your contributions up to 6 percent of your salary -- the most common scenario -- and you earn $75,000, that's $2,250 in lost savings this year.

But the opportunity cost is what really stings.

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Assuming a 7.2 percent average annual rate of return, that $2,250 yearly contribution would grow to $100,000 over the next 20 years through the magic of compounded growth. A five-year suspension would reduce that savings by 40 percent.

With a little financial planning, however, a loss of employer contributions to your 401(k) need not derail your retirement plan. In fact, it can be a good opportunity to establish new savings habits today that will provide for a more comfortable retirement down the road.

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