It is unfortunate to read about so many businesses cutting costs by reducing or eliminating the match of their employees’ 401(k) contributions. This is a particularly devastating blow to the retirement plans of baby boomers who have been depending on the employer match to rebuild dwindling 401k account balances.
Fortunately, this has not happened where Mr. GoTo works. Nevertheless, I have been thinking about what a baby boomer should do – if anything – in response to news that their 401k contributions were no longer being matched by their employer.
This is what I would do:
Investigate True Nature of Employer Contributions
Find Out How Long the Match will Disappear
You should try to determine for how long the 401(k) employer match will be eliminated. A short term, temporary pause in matching contributions may not require any response. If the matching contributions are reasonably expected to resume sometime in 2009, I would maintain contribution levels to capture as much of that match as possible.
Will the Employer Try to Catch Up Later?
Ask around to determine if your employer will make “catch-up” matching contributions when circumstances improve. To maintain employee goodwill, some employers may want to attempt to make its 401k participants “whole” by accelerating or increasing matching contributions later in the year to compensate for matching contributions missed earlier in the year. If that is the case, then you want to have contributed as much as is necessary to earn the maximum possible employer match.
Switch to Roth 401(k) Contributions
Find out if you can make Roth 401(k) contributions. Some employer-sponsored retirement plans include an option that allows the employee to make contributions on an after-tax basis. These contributions are then treated like those in a Roth IRA so that the contributions and all related gains can be withdrawn tax free in retirement. This is a great feature for baby boomers who (a) are not eligible to have a Roth IRA and/or (b) expect to face higher tax rates in retirement. If this applies to you, shifting to or maintaining Roth 401k contributions is probably the correct strategy even if your employer eliminates the match on other contributions.
Switch 401(k) Contributions to an IRA
Consider shifting your 401(k) contributions to a self-managed IRA. If your employer’s match is gone indefinitely and you do not have a Roth 401k option, it’s time to consider taking matters into your own hands. I would find a place to open a self-directed deductible IRA and max it out, using funds that you otherwise would have contributed to your 401k. A self-directed IRA – if properly selected – usually will give you more options and lower-cost options for investments. You can possibly also open an IRA for your spouse as well, funding it with money that otherwise would have been contributed to your 401(k). If you are not eligible to open up a deductible IRA, then you need to be more careful about this decision because by switching contributions out of your 401k, you will be paying more income taxes.
Re-Direct Contributions to a Tax-Deferred Investment
Consider re-directing your 401(k) contributions to a separate tax-deferred investment. This must be done with care because again, you are giving up the tax benefit of pre-tax 401(k) contributions. However, if you have been an ultra-conservative investor, you may have a lot of your 401k contributions going into a stable value fund inside your plan. Money in a stable value fund is not doing much for you and, if inflation spikes down the road as expected, it will be a net loser. So, if you want to stay conservative, you could instead put those contributions into a tax-deferred, inflation protected investment, such as I-Bonds. The return will be similar to a stable value fund in ordinary times plus it will provide inflation protection in the future.
These are the options and strategies for baby boomers and 401k plan participants with no employer match that I have been thinking about. What about you?
Image credit: Mohamed Riffath