The 401(k) Match Cut: What It Means For You in Dollars

It's a controversial move, but many companies are slashing costs these days by suspending their 401(k) match. You might be curious how much they're actually saving by doing so. According to Hewitt Associates, more than $1,500 per employee per year (that's assuming the average employer match of 50 cents to the dollar up to 6 percent of pay.)

The savings equates to $25 million a year for a large company, $10 million for a midsize company, and $2 million for a small company. But here's what it means for a younger worker earning $50,000 a year who contributes 6 percent of his/her salary: $16,000 less for retirement, according to Hewitt.

It's unclear why (a form of protest? a move to an IRA?), but research shows that when companies suspend their match, employees sometimes reduce their own 401(k) contributions, or they completely stop contributing. If the above employee stops contributing to their 401(k) for a year, he or she will have $48,000 less for retirement. And that's just a one-year suspension. If that younger worker stops contributing for five years, that number jumps to a whopping $150,000. These examples really underscore how important it is to contribute to a 401(k) early in your career.

 Here's what Hewitt thinks you should do if your company cuts your 401(k) match:

• Save more: According to Hewitt's research, the average employee can bridge the savings gap a company 401(k) match suspension creates by upping their contribution by just 3 percentage points a year.
• Diversify assets: Employees should make sure they properly diversify their portfolio by regularly rebalancing their asset allocation. Workers who are not financially literate can accomplish this goal by investing in target-date funds or managed accounts. For do-it-yourselfers, automatic rebalancing is a great tool to get the portfolio re-aligned regularly. These tools help workers maintain a proper asset mix, which can help offset the roller-coaster fluctuations of the market maximize their retirement savings. Hewitt research shows 77 percent of employers now offer target-date funds. About half (49 percent) offer automatic rebalancing and another 20 percent are likely to add the feature in 2009.
• Take advantage of advice: Many companies offer services and tools that can help workers make informed investment choices based on their particular needs. According to Hewitt research, 38 percent of companies offered online, third-party investment advisory services in 2008 and another 43 percent planned to add these services in 2009. In addition, one-fifth (20 percent) of companies currently offer managed accounts, which allow employees to delegate the overall management of their accounts to an outside professional.
• Don't cash out: According to Hewitt research, 45 percent of employees cash out their 401(k) plans when they leave a job. Although it seems tempting-and perhaps intuitive-to cash out 401(k) savings, employees will forfeit 20 percent or more of their account's value in federal taxes and another 10 percent in early withdrawal penalties. By keeping money in their companies' 401(k) plans — even when switching jobs or exiting the workforce — workers can continue to grow their savings in a tax-free environment and, in many cases, avoid higher investment fees typically associated with retirement savings accounts offered in the retail market.