In past recessions, many companies looking to cut costs and potentially avoid having to lay off workers suspended 401(k) matches.
In the most recent recession, Ascensus, a retirement plan administrator, said that 21% of employers that use its 401(k) services suspended their contributions from March to September 2020, The Wall Street Journal reported. Vanguard reported a much smaller share of cuts, 7%, during the height of the pandemic.
Despite fears of a recession, few plans have suspended 401(k) matches even though a growing list of companies have announced massive headcount reductions, Fidelity Investments and Vanguard, two of the largest 401(k) providers, told USA TODAY.
Even though many companies like Exxon that suspended 401(k) matching during the pandemic eventually brought it back, the lapse can be unsettling and confusing for workers who factor the contributions into their retirement calculations.
If you’re concerned that your employer will suspend matching, or they already have, here are some questions that may be on your mind:
Should you contribute to a 401(k) if you won’t get a match?
“You should still contribute as much as you personally can,” said Lisa Forsythe, a private client adviser at J.P. Morgan Wealth Management. “When it comes to investing for retirement, consistency is key.”
On top of which if you’ve already been making regular contributions to your 401(k), “you may be used to living off your current paycheck amount, which already factors in your contributions,” she said.
Importantly, you’ll still be able to take advantage of the tax benefits of investing through a 401(k) with or without your employer’s contribution, meaning the money from your paycheck that flows into your 401(k) will not be taxed. The Internal Revenue Service recently announced that the contribution limit for 401(k) plans will increase by $2,000 to $22,500 for 2023 because of inflation.
“Do not lose sight of that,” said Michael Liersch, head of advice and planning for wealth and investment management at Wells Fargo.
There’s a behavioral benefit to contributing, he said. If you get out of the habit of doing so and the match comes back, you could miss out. “You don’t want to miss out on that opportunity when the light switch flips back on.”
Should I lower my 401(k) contribution?
If you have a sense of a percentage of your income you need to save to retire comfortably at a given age and a portion of that was being fulfilled through a company 401(k) match, “that burden gets shifted to you as an individual,” said Nathan Voris, director of investments, insights and consultant services for Schwab Retirement Plan Services.
Therefore you should try to contribute more money to your 401(k) or other retirement savings accounts if you can afford to do so, Voris said.
Should you prioritize emergency savings over retirement?
If your company suspended its 401(k) match there’s a good chance layoffs could be around the corner.
To prepare for potential layoffs, Brian Robinson, a financial adviser and partner with SharpePoint, recommends making sure you have enough money to get by on a strictly bare-bones budget for three months.
If you don’t, put your retirement savings on hold but make sure you resume your retirement contributions once you hit your emergency savings goal, said Voris.
You could also continue to contribute to a 401(k) and access some of that money without facing early withdrawal tax penalties if you’re not 59.5-years-old and were laid off. But be careful – it could lower your unemployment benefits since 401(k) withdrawals count as income in many states.
