Barron's - June 6, 2020
As distressed companies search for ways to cut costs amid the coronavirus pandemic, many are reducing or eliminating a key component of many workers' retirement-savings strategies: matching 401(k)-plan contributions.
Losing the matching contribution—when an employer contributes a certain amount to your retirement plan based on the amount of your own contribution—can derail your savings progress and dampen long-term performance.
But many experts believe companies will restore their matches when business conditions improve, and in the meantime they say there are a few things to do.
Maintain the Match
“If you still have a job and can meet your financial obligations, then you should continue to save, and if you can, save even a little more—especially if your employer cuts your match,” says Robyn Credico, managing director of retirement, at Willis Towers Watson. “You still need the money.
Under what Vanguard Group says are ideal circumstances, plan participants making less than $50,000 a year should have a total retirement savings goal of 9% of their salary, says Dave Stinnett, head of the firm's strategic retirement consulting group. The fund titan recommends aiming for this level because most studies suggest that one will need to replace 70% to 85% of their pre-retirement income to maintain their lifestyle in retirement, and this is what's needed to get someone to a 75% replacement ratio.
So say you're a worker making just under $50,000 a year, and you're contributing 5% of your pay in order to get a 4% company match. If that 4% is removed, you should increase your contribution to get close to that 9% as soon as you can, he says.
Pro tip: If you do increase your contribution to your retirement plan to make up for a lost company match, think about your wherewithal to maintain that level if the match is reinstated, says Karen Wallace, director of investor education at Morningstar Inc. "It might make sense to just keep contributing a little more when your match comes back online if it's not that painful," she says.
Those who can't make up a lost company match or can't continue contributing to their 401(k) at all now should contribute more when they can afford to, Wallace says.
Stick to the Plan
While employees who are no longer receiving a company match may be tempted to consider alternatives to their 401(k) for some or all of their savings, financial pros say there are several reasons that most workers should stay the course.
"Looking into an individual retirement account is one possibility, but if you're working for a large company, chances are good you're not going to find funds that are much lower cost than those in your 401(k) plan," says Steve Vernon, a research scholar at the Stanford Center on Longevity and author of six retirement-planning books.
But if you're working for a smaller company with a 401(k) plan that might have high-cost funds, you may be able to find funds in an IRA that cost less, Vernon says.
Still, the amount you can contribute to an IRA is lower than the amount you can contribute to a 401(k) plan. For 2020, the total amount an individual can contribute to a traditional or Roth IRA is $6,000 or $7,000 for those 50 or older; direct Roth investments are also off-limits to employees with high incomes. These figures compare with individual employees' contribution levels in 401(k)s of up to $19,500 in 2020 or $26,000 for those 50 or older.
And even those in a small 401(k) plan need to decide if they can do better choosing their own investments in an IRA rather than sticking with those chosen by their employer's retirement-plan provider, Credico says.
For employees who've had their company halt their matching contributions and who plan to stay with their company, "I don't think there's a strong argument for taking your retirement funds and investing elsewhere as long as your plan has a comprehensive list of investments," Stinnett adds.
Retirement savers should also keep in mind that company 401(k) matches may be reinstated in short order. Some employers that have cut or suspended 401(k) matches this year have said the actions are temporary, Credico says.
If you take your money out of your plan and reinvest it elsewhere and the company match is then reinstated, "that's more work on your part and you may lose out" on some of that match, says Eliza Badeau, director of workplace thought leadership at Fidelity Investments.
Boosting HSA Contributions
Those who've lost a company match and are eligible for a health savings account may want to consider switching some or all of their regular 401(k) contribution to an HSA.
Investing this now-unmatched money in an HSA is "actually a better deal from a tax perspective than a 401(k)," says Vernon. That's because an HSA allows you to set aside pretax income that won't be subject to federal taxes on withdrawal if used to cover qualified health-care costs.
HSAs have become popular in recent years among savvy retirement savers as they provide what Bank of America calls their “triple tax advantage.”
Still, HSAs are available only to those enrolled in a high-deductible health-care plan. And there are limits to contributions. In 2020, the maximum contribution to a HSA is $3,550 for individuals and $7,100 for families. Those 55 or older can contribute an additional $1,000.
"Certainly, they can complement investing in a retirement plan," Stinnett says. "They shouldn't replace it though."
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