You Can Still Win If Your Employers Cuts off Their 401(K) Match

During hard financial times, such as the situation created by the COVID-19 pandemic, employers may cut their 401(k) match to save money. For employees, this can initially be quite concerning. After all, it reduces the amount of money being set aside for their retirement, potentially making it harder for them to achieve their goals on time. However, employers cutting off 401(k) matching isn’t the end of the world. It’s still possible to come out okay. If you are questioning whether or not you can still win if your employers cut off their 401(k) match? want to make sure you continue to win the retirement savings game, here’s what you need to know.

Matching Isn’t Required

First, it’s important to understand that offering a 401(k) match isn’t a requirement. Companies generally provide matching retirement funds as a retention or recruitment tool, ensuring they can entice top-tier professionals into working for them. There is no law that says an employer has to make one available.

The only time when you may be able to fight the ending of a 401(k) match is if there is something in your employment agreement that guarantees one. However, this scenario would be incredibly rare, so there is a good chance the company is acting within its legal rights.

Making Up the Difference

Employees have the ability to make up the difference of employers cutting off 401(k) matches. However, it does have to be an active decision.

First, you may be able to increase your 401(k) contribution at work. This would allow you to keep investing in the same manner, centralizing your retirement-related savings and keeping your monthly deposits at a similar level.

Currently, employees can contribute up to $19,500 a year. If you are 50 years old or older, you can also make catch-up contributions up to $6,500 a year.

Second, you could fund an IRA instead of increasing your 401(k) contributions. You’re allowed to contribute to both kinds of plants every year. But, with an IRA, you may have more options and overall control.

Plus, if you qualify for a Roth IRA, your deductions aren’t tax-deductible, but your withdrawals can be tax-free. This could be beneficial if you may have a higher tax liability in retirement than you do currently.

In total, you can contribute up to $6,000 in an IRA. If you’re 50 years old or older, you can also make an additional $1,000 in catch-up contributions.

In either case, making up the difference may mean having to tighten your budget. While this can be hard to manage, it’s wise to do what you can to keep your retirement on track if you have that option.

Reexamine Your Allocations

The current investment landscape is a bit volatile. As a result, your portfolio may not be ideally balanced based on your preferences.

You may want to take a moment to examine your allocations for two reasons. First, you may have investments that aren’t ideal in today’s climate. Second, there could be opportunities for significant gains in certain sectors, particularly those that have been hard-hit by the pandemic but are likely to recover.

However, you don’t want to make any panic-based changes. Most people’s portfolios have seen their values change significantly, but that doesn’t mean their initial investments still aren’t sound. While COVID has shaken up the markets, there’s a decent chance they will recover in the coming years, allowing the value of your portfolio to return to relatively normal.

Don’t Tap Your 401(k)

When your employer cuts off 401(k) matching, it may be tempting to withdrawal funds from your account. After all, it isn’t going to be growing as quickly, so you may think that makes it a good time to use the cash for other purposes.

The issue is, if you’re younger than 59 ½, you’ll probably get hit with a 10 percent early withdrawal penalty. There are a few exceptions that allow you to avoid the penalty, but they tend to be incredibly strict.

Additionally, removing money means you are missing out on long-term, tax-deferred growth. Even if you stopped making all contributions today, the value of your 401(k) could still go up over time.

Plus, even if your employer isn’t offering 401(k) matching at the moment, that might not be the case for the long-term one. Once its financial situation settles, it may reinstitute the match.

Finally, if your current employer doesn’t bring its match back, you can still win. If you find another company that is offering a 401(k) match and secure a position there, you may be able to roll your 401(k) over into their plan. That way, you can keep all of your savings centralized and get a coveted benefit back.

Be Vigilant

If your employer suspends 401(k) matching, make sure to remain informed of any other changes they make to your benefits, both positive and negative. You want to know quickly if your company is bringing matching back, allowing you to adjust your savings strategy at the proper time.

Similarly, knowing whether other benefits are being cut is just as important. More cuts could indicate the company is struggling to stay afloat. If that’s the case, you may want to boost your emergency savings or start exploring new opportunities, in case the worst-case scenario happens and the business has to shut down.

Additionally, you may end up having to shoulder a larger financial burden because you don’t have access to certain value-providing perks. It’s important to know that is coming if that is the situation, giving you a chance to make budget adjustments or change your actions based on what’s best for you.

Did some of your employers cut off their 401(k) match? Did it change the way you save for retirement? Share your thoughts in the comments below.

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Tamila McDonald

Tamila McDonald is a U.S. Army veteran with 20 years of service, including five years as a military financial advisor. After retiring from the Army, she spent eight years as an AFCPE-certified personal financial advisor for wounded warriors and their families. Now she writes about personal finance and benefits programs for numerous financial websites.