My Company Cuts 401(k) Matching Contribution, What’s Next?

Well, it finally happened to me. Last Friday, my company announced that it is halting 401k matching contributions, raises, and promotions for the remainder of the year. This is definitely better than losing my job, but between the match and the raise, that’s a good 5-7% loss of income. I am sure many of you are in a similar situation, so I just want to go over what I am planning to do.

What Should You Do If Your Company Stop 401k Match?

Before I even go into the details, I want to say that the second worst thing you could do is stop saving for retirement. And the worst thing you could do is withdrawing money from your 401k because your company stops matching.

nest egg
Photo by Angelray via Flickr

Contribute To Roth IRA First

You may be one of the individuals who had to decide between investing in a Roth IRA or a 401k. If you chose to invest 401k over Roth for the company match, now is a good time to give Roth your top spot. Roth IRA doesn’t give you any immediate tax benefit, but your investment grows tax-free. This makes it better than 401k for most people. So, max out your Roth (2009 Roth IRA contribution limit is $5000, and then contribute to 401k if you have more to save.

Here’s a special note for the not so discipline. If you depend on 401k automatic contributions to save money and know that you can’t put money away for Roth, you might be better off sticking to 401k. Otherwise, work with your bank and HR to see if you can set up some kind of automatic payroll deduction.

Keep Contributing

Other than switching to Roth for the first $5,000, there’s no reason why you should stop contributing to your 401k. Personally, I am planning to keep investing even without the match. Yes, it sucks to lose the matching amount, but this doesn’t change the fact that you still need to save for retirement somehow.

Make Up The Difference

I am really glad I embarked on my journey to create alternative income streams and earn extra income about 20 months ago. Aside from the extra income, my side job allows me to save money in a SEP IRA Simplified Employee Pension Plan. This plan helps reduce my tax burden, and lets me save more for retirement.

If you have been thinking about becoming less dependent on your job and earning more money, you should dive in now. It’s not too late for you to start — in fact, it’s never too late.

Is your company one of the many that decided to stop 401k matching contribution? What have you done as a result?

About the Author

By , on Mar 22, 2009
Pinyo
Pinyo is the owner of Moolanomy Personal Finance. He is a licensed Realtor specializing in residential homes in the Northern Virginia area. Over the past 20 years, Pinyo has enjoyed a diverse career as an investor, entrepreneur, business executive, educator, and financial literacy author.

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Leave Your Comment (19 Comments)

  1. Nick says:

    Manuela: I would recommend taking government out of the equation, IRAs, Roth IRAs and other such retirement plans are plans created by the government and the way things are looking right now I personally don’t want the government having any more of my money than they already do. take a look at this Wall Street Journal article: copy and past this (http://online.wsj.com/article/.....%3Darticle ) into your browser then scroll down to the section called “A Personal Bank” I am of the opinion that we need to start thinking outside of the box financially and by becoming your own bank you can safely and effectively meet your financial goals. let me know if you have any questions.

  2. Manuela Ortiz says:

    Hi, the 401k plan at my company never put any money in our account, I did rollover from my previous company ($35,000.00) now I want to rollover the money to a IRA because am not happy with the institution who holding the money, I was told I can’t do any rollover because am still working in the company, what can I do? please I need help!!!!!!!!!!

  3. Pinyo says:

    @Nick – Thank you for answering Mike’s question.

    @Mike – You are always entitle to the money you contributed. However, you have to check with HR to see if you’re fully vested for the portion that the company previously gave you as matching contribution. You may not be 100% entitled to this portion. In any case, you still have to keep it in your 401k because a withdrawal would result in taxes plus early withdrawal penalty.

  4. nick says:

    Mike: Yes you are! And if I were you I would get your money out of there. Consider some alternatives to a 401K, one that I have helped lots of people start up is creating their own bank. If you want to learn more about this idea let me know! nick[@]eaglecapitalmanagement[.]com

  5. Mike says:

    Am I entitled to my 401 k Contributions if y company stops matching?

  6. nick says:

    mr. touchmoneylove……any kind of 401k or IRA is an agreement with the IRS, it is a retirement system created by the government that is controlled by the government. all they have to do is declare a state of emergency and they can take whatever they want from your “qualified retirement plan.” dont you think 11 trillion dollars in debt is somewhat of an emergency?

    You are right without a match it makes no sense but truly, even with a match, the only way to win with a 401k or any kind of IRA is to expect to be in a lower tax bracket in the future than you are now. for 99% of the people out there that is not the case.

  7. Pinyo says:

    @Mr. ToughMoneyLove – Very good point and probably deserve a whole article to explain the concept.

    @Bob – Unfortunately, I don’t have enough cash flow to afford front loading. I can contribute up to 80% of my salary, but I’ll be digging into my emergency fund if I do that. Not good, especially if I happen to lose my job later.

  8. nick says:

    What if there was a way to effectively save for retirement regardless of whether or not you had a company matching your 401k? Too many people are getting caught in the ‘retirement trap’ and when it comes time to retire they barely have enough funds to survive let alone enjoy their retired life. Stop worrying about match or no match, losing 40% in your IRA or Roth IRA and put it somewhere risk free.

  9. Adam says:

    I completely agree with reducing contributions to your 401(k) and increasing them to a Roth IRA. Fortunately, my company still matches my contributions of up to 6% of my base salary with $0.75 on the dollar. Loosing the match is certainly better than loosing the job, but if our match ever gets axed I’ll change my contributions to max out my Roth IRA first.

  10. Bob says:

    If your company 401K policy allowed you to front load your contributions, you should have done that in the first three months. At least that would have given most out of 401k matching. Fortunately my company is still matching but unfortunately front loading is not allowed.

  11. craig says:

    It seems that is the first to go for a lot of companies which makes sense. At least you still have a job and hopefully your job is secure.

  12. Depending on your tax bracket, contributing to any 401(k) without a match (and without a Roth option) may not be a good idea. Younger folks might be better off paying income taxes now then investing in some other tax-advantaged investment for long term growth or paying off debt. When you pull that money out of a 401(k) in 20 years or more, your marginal rate could be so high you’ll choke on it and have one of those “what was I thinking” moments. Plus, the government will probably be means-testing Social Security and Medicare benefits by looking at your other retirement accounts. I am leaning toward owning assets free and clear that can provide direct tax-free benefits (shelter, transportation, etc.) rather than money-based assets that the government will heavily tax or otherwise use against you in determining benefit eligibility. It’s a new money world that requires new money thinking.

  13. Matt SF says:

    Great plan Pinyo. Placing the Roth IRA ahead of the 401k in this situation also provides a greater selection of funds to choose from.

    My former employers always had a limited supply of mutual funds in their retirement packages, so picking mutual funds was almost like trying to find the best loser of the group.

  14. Amy K. says:

    I’m doing exactly as you outlined above: staying the course, and making sure I max out my roth.

    My company is not doing a match in 2009, and the match is stopped until further notice. On top of that, the 2008 match has not been made, and may be delayed until the last possible date: September 15, 2009.

    The good side of that: the 2008 match, when it comes in, will “buy low”.

  15. Steve says:

    Pinyo, great thoughts. When change happens around us, the only thing we can change is what we think, feel, and do. I am glad to read about the fact that the decision you made 20 months ago is paying off now, so that you don’t have to be too bumbed about the match on the 401K. Now excuse me, but I have to get to work on those alternative sources of income!

  16. Pinyo says:

    @PT – Thank you for sharing. Yes, it sucks but life goes on. At least we both still have our jobs.

    @Nicki – Sorry to hear that. Hopefully, your husband will get something in December. My company made it clear that there will be nothing given out in 2009 — except for the executive bonuses, of course.

    @Neal – That’s exactly how I see it. It’s not under my control and I am best working on things that I could control, like extra income. 🙂

  17. Neal Frankle says:

    Right. Good solid advice.

    Unfortunately, that is the world we live in today and we’ll just have to come to terms with it since we have no control over it.

  18. Nicki says:

    The same thing happened to my husband. No 401K match, no bonus, no profit sharing. Raises don’t come until December, so I’m still holding my breath on that one. You’re right though … at least he still has his job.

  19. PT Money says:

    Yeah, I got bit too. It takes affect next week. Hopefully it’s a temporary move. I’m very disappointed in the company. I think it’s the wrong program to cut and it sends a bad message.

    Luckily though, I think people are creatures of habit and will not stop contributing by and large.

    I like your positive, no whining approach to it all though.

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