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When Your Company Stops Matching Your 401(k) Contribution

This article was written by in Investing. 16 comments.


Yesterday, GM announced that it would be suspending the company’s matching contributions into its employees’ 401(k) retirement plans starting November 1 and lasting until financial conditions improve. For people like me who make their living working for a corporation, the 401(k) match is practically expected.

One way to look at the company match, if dollar for dollar like the plan offered by my employer, is as if it were an immediate 100% return on your money. There’s no sense in turning down a guaranteed doubling of your money, so it makes sense to choose to contribute to your 401(k) at least enough to receive the maximum match.

After that, if the investment options are good, it’s a good idea to contribute as much as possible. I’m working at investing in my 401(k) to the maximum amount allowed by law, but it looks like I’ll fall short this year. I’ve decided to invest beyond the maximum match offered by my company, 4% of my salary.

If those who make these decisions at my company were to announce that the employer matching contribution would be suspended, I would probably continue investing in the 401(k) for the tax benefit, half in a traditional 401(k) and half in a Roth. But if I didn’t have extra income, I’d probably be investing only 4% of my salary, taking advantage of the maximum company match and nothing more. Without the company match, I would have a tougher choice.

My investment options in the 401(k) are mediocre at best. Expense ratios are high, and I’d prefer index funds rather than managed mutual funds. But in the end, it still makes sense to invest in a 401(k), rather than invest in a regular brokerage account, thanks to the tax advantaged status. In a regular brokerage account, you’ll have to pay taxes on your gains in addition to having less to invest with in the beginning after tax.

This also assumes that you will be in a lower tax bracket when you retire, which may not be the case considering your goal is to have as much retirement income as possible and the fact that low tax rates and high national debt now may mean higher tax rates all around in the future.

Would you invest in your 401(k) if your company stopped matching a portion of your contributions?

Photo credit: femaletrumpet02

Updated January 16, 2010 and originally published October 24, 2008. If you enjoyed this article, subscribe to the RSS feed or receive daily emails. Follow @ConsumerismComm on Twitter and visit our Facebook page for more updates.

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About the author

Luke Landes, also known as Flexo, is the founder of Consumerism Commentary. He has been blogging and writing for the internet since 1995 and has been building online communities since 1991. Find out more about him and follow Luke Landes on Twitter. View all articles by .

{ 16 comments… read them below or add one }

avatar Michael Campbell

Absolutely keep contributing! Rule #1 is to maximize tax-free or tax-deferred income.

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avatar Lance

Based on my hire in date, I am included in the pension plan at my employer and do not get a company match. I do however get a year-end contribution regardless on my contributions to the 401K.

Based on the fact that I agree that taxes are pretty much guaranteed to be higher in the future than they are now, I am going to max out my Roth IRA before contributing to the 401K.

My order for all retirement contributions:
1 – Maximize matching contributions (401K)
2 – Maximize tax-free contributions (Roth IRA)
3 – Maximize tax-deferred contributions (401K)

If you follow this order you always know what to do when circumstances change.

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avatar ChristianPF

If my company stopped matching, I would be out of there. I would be funding a Roth IRA instead. The only way I would start contributing again would be if I could max out the Roth contributions each year, then it might be worth contributing to the 401k again.

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avatar KC

I agree with Christian. I’d fund my Roth fully (if I wasn’t already). The Roth has more flexibility and less expensive options to invest in. Besides if my company is suspending 401k matching then they will start laying people off next (like Chrysler did this morning). I’d be building a bigger emergency fund with the money I wasn’t contributing to my 401k. Sometimes you have to put retirement on hold. When the possibility of losing your job is this real, I’d be putting retirement on hold.

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avatar Aryn

My company doesn’t match and has never matched. They do have the option of an annual defined contribution, but haven’t done that yet. I contribute a small amount just in case they do eventually decide to make a contribution and I need an account first, but I’m going to start a Roth IRA soon so I can increase my savings with better options.

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avatar Donny Gamble

I’m guessing that other companies will follow in these footsteps to reduce budget spending. A lot of companies are losing tons of money right now and they need to find other alternatives to slash company costs.

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avatar Anca

I’m getting laid off next month, before any of the matching contributions vest, so I lose it anyway.

PS: The comments aren’t displaying properly on this post. They’re cut off. I check a post from last month and they were fine there.

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avatar Anca

(Nevermind, the comments look fine now.)

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avatar Andy Chilton

I agree that turning down employer contributions is a bit silly. However, it’s really hard to decide whether I would still contribute if the employer stopped contributing. I reckon I’d have to see what my financial situation was at the time. BTW: here in New Zealand we also get a tax incentive to contribute so I’d probably do enough just to get that.

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avatar Luke Landes ♦127,371 (Platinum)

Anca: Sorry to hear you’re being laid off. Good luck with everything. And about the comments — I was working on that this afternoon so pages may not have been displaying correctly for a while.

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avatar David

If my company stopped matching 401K contributions, I would stop contributing and instead put the same amount of money in an individual IRA. My priority would be to max that out, as it would have all the tax benefits and more options. Once that was done, I would put money back into my 401K.

I agree with the readers above that my priority is the Roth vs. Traditional. I believe that taxes can only go up. Also, my goal is to be making more money (thus being in a higher tax bracket) later in life, so I’d rather pay the taxes up front.

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avatar Mike

Certainly I’d fund the Roth first. But then, I’d seriously consider skipping the 401k altogether and putting my money in a taxable account. A lot is unknown (i.e., about the future), but let’s consider the known: the typical 401k plan, and that probably means yours, has far FAR higher expenses than what you can find in a taxable account; and “expenses” are charged every single year, whether your stocks are up, down, or sideways, while the taxes a 401k plan defers are actually charged only on gains– which is to say that the “expenses” of a 401k plan can easily add up to much more over time than the “taxes” of a taxable account. Of course, to the individual whose concern is simply maximizing wealth, it makes no real difference rather the “taxes” you pay are actually called “taxes” (i.e., they are paid to the government) or are really taxes but are called “expenses” instead (i.e., they’re paid to the 401k plan-provider). Let’s put it into dollar terms: if you have $100k in a 401k that charges 1% per year, you’re paying a $1k “tax” every year, not to the government, but to the plan-provider. Whereas if you have your $100k in a taxable account, you might, for example, earn $2500 in dividends, taxable at 15% which is $375 (well less than $1k, obviously); and if you’ve done very well on one of your stocks, say you’ve turned $5k into $8k, you could sell it and realize the gain… but make that $3k profit go away for tax purposes by selling a stock at a loss. Assuming you take the proceeds from that “loss” and immediately buy a highly similar but “not substantially identical” stock (this is IRS-speak), then it’s not really a realized loss, but just a paper loss, whose sole purpose is to BE a paper loss for purposes of wiping out a gain in the eyes of the IRS. Meanwhile, the gain is still there, it’s real money you can invest elsewhere or spend, and the “loss” is simply a position that’s currently down but that you’re expecting to do well over the long term (otherwise– DUH!– you wouldn’t hold that position). (Note: you may be wrong in your assessment of the stock; it may not go back up. But if you’re wrong in your taxable account then obviously you’d be just as wrong in your 401k; the nature of the vehicle doesn’t have any bearing on whether you’ll make the right investment choices).

That’s just what we know. What we don’t know is where tax rates will go in the future. But we can speculate on this; given the huge debts, and deficits, of the federal government; and given large “unfunded liabilities” for the future (Medicare especially); and given the demographic trends; the smart money says that the tax rate is going to go up over the next 30 years. If that turns out to be the case, then you’re better off paying your taxes now while taxes are “on sale”, investing money on which you’ve already paid taxes, and then having to pay taxes later at the higher tax rate ONLY on gains, not on the original contributions (which you would have to do if you were to “defer” your taxes).

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avatar Lazy Man

I must be an oddball by being in a few start-up companies since 2001, getting a 401k match is a luxury I haven’t seen in a long time.

Due to better investment options and low taxation on capital gains taxes, it may be an advantage to not contribute to a 401k if there’s not a match.

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avatar Writer's Coin

That’s a tough one. My company also does one-time matching once a year, so it isn’t a continuous thing. Right now I contribute 8% but without the match I don’t know what I would do. If you’re not happy with the plan you’re in I would say something to your HR department. If you can make a good case for it (index funds and low expense ratios are a great place to start) they might make some changes. I brought this up and it looks like we’ll get more index funds. The expense ratios may not be as low on a similar index fund outside of a 401(k), but it’s still way below the crazy 1% ratios some funds charge.

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avatar Lisa

My company just announced it will no longer match our 401K starting January ’09. The plan is through T.Rowe Price, and the choices of mutual funds are lousy 1 star/no dividend/high expense ratio offerings. I moved what little money I had left ($37,000) in the plan’s money market, earning roughly 2.5%. Can I stop contributing money in that plan and instead open an IRA through another brokerage firm? If so, would it be a pre-tax contribution? My HR dept said no, my co-workers say yes. I also max out my Roth contributions every year.

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avatar Lori

Today my company announced that it will temporarily suspend all company matching contributions to the 401(k) Plan. And will permanently freeze all future benefit accruals under the Pension Plan and the Supplemental Pension Plan.

How can contribute to a Roth IRA automatically from my pay in place of the 6% deductions I’ve been with for the past ten years?

I would like to continue contributing to a tax-free program but am not sure how.

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