The Latest Bad News For Your 401(k)?
Sunday, October 26, 2008
As if your 401(k) hadn't been through enough.
American workers, forced to look on helplessly as the value of their 401(k)s sink in sync with the Dow, now have something else to worry about. On Wednesday, General Motors told its nonunion employees that starting next month, it would stop matching their contributions to their 401(k) plans until business conditions improve.
The move by the largest of the Detroit automakers reverberated well outside the auto industry. It raises the specter that the economic downturn and stock market turmoil could deal yet another blow to retirement savings at a time when employees are already being squeezed by higher health-care costs or worse -- layoffs. Twenty one percent of the 248 employers recently surveyed by Watson Wyatt Worldwide, an Arlington consulting firm, said they had already raised employee contributions for health care, and 25 percent said they planned to do so in the next 12 months. Nineteen percent said they had laid off workers, and 26 percent said they planned to cut jobs in the next 12 months.
For now, suspending or reducing 401(k) contributions remains a last resort for troubled businesses. The Watson Wyatt survey found that only 2 percent of employers had done so and that 4 percent said they planned to in the next 12 months. More companies may consider it if their financial position gets worse.
It's happened before. Companies cut back on 401(k) contributions during downturns in the 1980s, 1990s and during the economic slump that followed the terrorist attacks on Sept. 11, 2001. From 2001 to 2003, companies such as Charles Schwab, an investment firm based in San Francisco; CMS Energy, an energy company based in Jackson, Mich.; and Goodyear Tire & Rubber, the world's largest tiremaker, based in Akron, Ohio, did so.
In many cases, they restored the matching payments within three years. Goodyear was an exception. It plans to restore matching payments in January 2009, said spokesman Scott Baughman.
So what do you do if your employer decides to cut back on matching payments to your 401(k)?
First, get a handle on how much the change would set back your retirement goals. "Redo your financial planning and figure out if you need to save more now," said Robyn Credico, Watson Wyatt's national director of defined-benefit consulting.
Even if you can't put away more money, the best option for the vast majority of workers, several financial planners said, is to keep putting in money because the market will rebound eventually.
"Hopefully you'll be buying into greater growth down the line," said Kristan Anderson, director of retirement plan services for West Financial Services, a financial planning firm in McLean.
By maintaining automatic payment deductions, you're also more likely to save, planners said. Even when people have retirement savings accounts outside of their plan at work, many don't have the discipline to consistently add to it over the long haul, said Dan Keady, director of financial planning for TIAA-CREF, a New York financial services company.
Though it can be hard to resist the urge to pull out your money and cut your losses, financial planners say sticking to your guns should pay off in the long run. The benefits of the tax advantages of contributing to your 401(k) along with compounding, Keady said, will most likely outweigh the temporary blip of a year or so of missing or smaller matching payments.