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What to Do If Your Employer Cuts Your 401(k) Match Thumbnail

What to Do If Your Employer Cuts Your 401(k) Match

8 MIN READ

The coronavirus pandemic has led to huge amounts of financial upheavals in the business world. It has sent shockwaves through employer’s and employee’s pockets, and if you are anything like the tens of millions of Americans in dire financial straits right now, it might have you worrying about your retirement fund.

With a lot of companies having to cut costs just to simply get through each day, you can bet every manager is looking at the best cost-cutting measures to make it. An appetizing option is freezing its 401(k) matching contribution plans, taking away matching employer contributions from its workers’ funds.

Obviously, this is a scary time for everyone, but if you put a decent portion of your income into your retirement investments, it can be even worse if your boss and company don’t give a 401(k) match to your contribution. This is even worse if you are nearing retirement.

What should you do to combat this? This guide will show you how to lessen the impact of no employer match.

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How Employer 401(k) Match Contributions Work

For financially-smart people, looking for employment options with matching retirement employer contributions is one of the smartest perks to look for. It will give a boost to your retirement income and provide you with more of a reason to start saving for retirement earlier. Retirement savings are wonderful for these people.

Obviously, it might not seem like it’s a smart idea for employers to match funds on a strict money-in, money-out basis, but an employer match greatly helps with recruiting. Employees love great matching options, so they’ll be more willing to stay on the team in the future due to the employer match to your 401(k) matching contributions.

Employers also will have a limit to how much they will contribute up to. For example, Vanguard provides a 50% employer match on the first 6% a worker saves. Some employees provide tiered options for their employer match with their employees’ personal finance, where, for example, if an employee saved 5% of their salary while an employer matches the first 4% dollar-for-dollar and the next 1% at a 50% rate, then the employer will match 4.5% of the 5% employer contribution.

Regardless, this is free money. Take advantage of it as much as you can for your personal finance greatness.

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Impact of Cutting 401k Matches

Financial crises always lead to employee contributions being one of the initial cuts to save money for the business. During previous financial downturns, hundreds of major American companies suspended their 401(k) matching contributions. This affects many citizens throughout the country, with the financial crisis of 2008-09 seeing 4.9% of all 401(k) plan contributors have their matches cut.

It can take a couple of years for all companies affected by the pandemic to fully restart their retirement fund programs. That sounds scary, especially given the fact that thousands of dollars per year are contributed for free by employers. One year can turn into two into three, which can then mean over $10,000 lost by employees’ retirement numbers. And that’s before interest is added towards your account.

Cutting 401(k) plan matches will lead to millions of dollars saved per year by companies. While more money saved is better for the company’s spreadsheets, it will lead to lower morale by all employees. People will be more likely to look for other jobs. That’s not what a company wants to deal with at all.

When anyone tries to save for retirement, watching your calendar dates move towards your retirement age makes your retirement savings plan details mean more. When you are dealing with penalties due to trying to take funds out, even during times like this, it can lead to your company-sponsored retirement plans deferring your hopes to achieve early retirement. This current volatility makes it hard to plan for retirement with federal income tax and penalties coming into play.

So, if there’s no match, what can you do to make the most of an awful position you’ve been put in?

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What to Do If Your Employer Cuts 401k Match

Right away, your thoughts need to go to a few things first.

During the pandemic, any loss of money will lead to immediate issues regarding surviving week-to-week. If you have a family, you need to think about what will benefit your family in the here and now. While matching an employer contribution is great, being able to put food on the table is better. So if that’s all settled, it’s time to think about the future as well. 

Retirees always benefit from their individual retirement account employer contribution plan from many years ago. Even through hardship like other recessions throughout a calendar year, these self-directed benefit plans will lead to advantaged senior years because of their contributions before retirement.

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1. Use caution before withdrawing money from your 401k

If you’re in a financial bind, under almost any circumstances, do NOT withdrawal and money from your 401(k). It will lead to a 10% early withdrawal penalty, meaning you will lose money on your potential earnings after your legitimate retirement.

Right now, the Coronavirus Aid, Relief, and Economic Security (CARES) Act is making it simpler to withdraw funds without taking a financial hit as a result. Instead of a 10% penalty, it will be waived for you as long as you pay back the money to your retirement account within three years. Think of it as a loan from yourself to yourself that you have three years to pay back off. While it won’t be a debt you’ll incur if you’re unable to repay it, you’ll have less money than you would have in the long run.

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2. Review your investment strategy

There are so many companies in the corporate world with full waves of positives and negatives on the stock market. Funds across the market are going up and down, and your previous pre-pandemic investments might be wildly off your goals at the current moment.

What’s the best thing to do in that circumstance? Well, it’s time to look at your portfolio and change where you allocate your income. 

With the market in as crazy a time as there could possibly be, it is a good time to talk to professionals in the industry who know as well as anyone what to do with your current investments. Should you stick it out? Should you jump ship and sell, sell, sell? You will have to talk about all options, from readjusting your investment mix to keeping tight. There’s really no telling where the market will end up and who will be left standing, but having people who know more than most guide you will be a welcome addition.

3. Maintain or increase your retirement contributions

If you have been contributing a set amount to your 401(k) plan every paycheck along with getting contributions from your employer, it may be a tough pill to swallow knowing that your contributions will be worth less without the additional funds.

However, that doesn’t mean you have to contribute less. If you can manage it and still are getting a worthy income, try to keep up with your contributions. This will still add on to your post-retirement income, and although it won’t be quite as much, it’ll be much better than contributing nothing. 

If you can afford it, increase your contributions. Think of it as a gift to your future self that will be worth more than what it is to you now. While it may be a harsh reality to accept, getting less or none in regards to employer contributions should not stop you from helping yourself still.

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4. Consider a Roth IRA

Here’s an interesting option. Why not continue to contribute to an employee-sponsored 401(k) plan while also contributing to a Roth IRA?

Roth IRAs are retirement funds with a twist on 401(k)’s pre-tax contributions. You invest your after-tax funds into Roth IRAs, but once you take the money out in retirement, you will not have to pay tax on it like you would with typical 401(k)s. If you feel like your potential earnings put you in a higher tax bracket once you retire, it’s a smart idea to look into potential options.

You can contribute up to $6,000 if you are under 50, or $7,000 for those 50 and older, to Roth IRAs in 2020.

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Your 401k Match May Not Be Cut For Good!

While the world seems crazy right now, it’ll come back to normalcy in the future. That could be in a few months, too. It’s a gradual process, and everyone needs to handle it in their own way.

Retirement savings with retirement plans or just one retirement plan can always lead to questions about different retirement accounts, especially during this time.

From dealing with the IRS deferred investment options, taxable withdrawals, deductions, different retirement savings plans, tax free lump sums, tax-deductible contributions, learning what you are exempt from, talking with plan administrators, changing brokerage firms, and finding what your best investment choices are....the questions are endless.

But don’t let your questions about retirement planning lead you away from keeping up with your contributions. You’ll possibly still have your pension plan or pension plans set still, and while paying income taxes is never fun when it comes to withdrawn funds, it’s even less fun having to play catch up.

Just because the world is out of whack doesn’t mean you shouldn’t let your retirement funds follow the same way. The pandemic has led to so many employment problems with millions of Americans out of jobs. Companies are looking towards retirement contribution cuts to save money, and while so many are dealing with that by not dealing with it, don’t let yourself be one of them.

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