Your employer 401(k) retirement plan is a type of defined contribution plan that qualifies for tax advantages under the IRS code.  Your “defined” contribution is usually a percentage or a flat rate of your regular paycheck.  However you contribute to your retirement savings plan, it is likely that your employer also has a matching contribution, where they will contribute as much as you do each month up to a limit, usually 6 percent of your pay. 

The State of Today’s 401(k) Matches

This employer contribution is free money to your retirement fund and is completely voluntary as goodwill to employees.  Unfortunately, in hard economic times, many employers put a suspension on their employee 401(k) matching in order to save expenses.  In fact, since the beginning of 2008, over 30% of all U.S. employers have suspended matching employer sponsored 401(k) accounts, and another 30% is expected to suspend matching in 2009. 

Sometimes the suspension is temporary, such as 6 to 12 months, or permanent.  Whatever the length of time, your 401(k) will feel a financial impact.  How should you adjust your saving behavior to protect your 401(k)?

How The Lack of Matches Impacts Your Retirement

Even if your 401(k) employer match is suspended for only 12 months, it could ultimately reduce your retirement savings balance by tens of thousands of dollars.  Say, for instance, that you were a worker earning $60,000 per year.  If both you and your employer contributed 6 percent per year, or $3,600 each, that doesn’t mean your balance would just be $3,600 short after 12 months.  That $3,600 compounded over 30 years of an average 8 percent interest could be a loss of almost $40,000 at the time of retirement.  Even if you retire in 10 years, that’s still almost $8,000 less you’ll have in your retirement fund.

During the recession of the early 2000s, employers responded similarly.  Many employers suspended their 401(k) matches for anywhere from 6 to 24 months between 2001 and 2003.  In response to difficult economic times, it seems that reducing HR benefits is a first approach to avoiding layoffs, or ultimately to avoid going out of business.  And if the economic hardship can be waited out, most employers reinstate their matching program for their employees.

Ensuring that You Maintain Your Contributions

Another danger in suspending 401(k) matches is that some employees may stop participating altogether.  Without their employer matching contributions, and seeing their 401(k) balances reduced by stock market declines, they feel that their own contribution is worthless. 

It is important, especially for those who have many years to go until retirement, that you continue contributing into a 401(k) account.  The ultimate reduction in the final retirement age balance can be devastating even after five years of non-contribution.  If you are experiencing a suspension of your 401(k) matching from your employer, talk to a qualified retirement wealth specialist at www.kenhimmler.com or retirement asset management company at www.iamllc.biz to get the answers and advice you need to keep your retirement fund in shape.

Authored by Kenneth Himmler, Sr.