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Keys to Protecting Your 401(k) If Your Employer Ends Contribution Matching

Filed under: Investments, Saving
Tags: , — Written by: Simos
June 25, 2010

Photo by: Sanja Gjenero (Stock Exchange)

In a previous post, we introduced 401(k) retirement savings plans. If started early and kept growing with a good rate of contribution from both employee and employer, the 401(k) can be one of the best ways to keep the bills paid after leaving the workforce.

But there’s the catch: the vitality of the 401(k) and its ability to stand up to big post-retirement challenges is built largely on employer contribution matching, where “the boss” chips in a quarter or more for every dollar an employee draws into his or her plan.

What happens when, after years of plugging along on your investment, an employer suddenly withdraws their support for contribution matching? Today, we’ll talk about what to do.

Key 1: You Can Protect Your 401(k) in a Job Switch

Under today’s economic conditions, thinking about switching job for better long-term dividends on your retirement plan definitely sounds like “the nuclear option.” But if you’re already considering a career move, the implications of non-matching over the decades might push you further in that direction. It is possible to protect your 401(k) funds while switching employers, but the process can be complex.

If your new employer has a comparable 401(k) plan, you can transfer your old plan to their new one. Remember that this should be executed as a “trustee-to-trustee transfer”, where the administrator company of your old plan deals directly with the administrator of your new plan. If, at any point in the process, your old plan administrator cuts you a check on the value of your 401(k), you’ll be hit with tax penalties that could reduce the value of your investment substantially; in some cases as much as 50%!

If you are not satisfied with the investment options offered by your new employer’s 401(k) plan, or are not eligible to transfer to the new plan (for example, due to a probationary period as part of your new employment) then you can opt for what’s called a “rollover” IRA. This is a somewhat complicated topic and will be covered in more depth in a future post.

Key 2: You Can “Tough it Out” – With the Right Moves

Jumping ship probably won’t be possible for the majority of workers, even once the boss axes contribution matching. After all, you’ve probably built up a lot of other forms of “equity” in your current place of business; human and professional “capital” that you aren’t eager to put aside. If you must continue on at a workplace where contribution matching has been eliminated, you should diversify your savings and investment strategy.

Your first move should be to evaluate the impact on your long-term savings; an independent financial advisor can help you determine this fairly easily. The second step is to open up other avenues for savings. While you should continue funding a 401(k) even without matching, it’s also wise to consider building up a cash reserve in a separate savings account or other low-risk investment.

The end of contribution matching may signal larger fiscal issues with your employer, and many experts recommend having 3-5 months’ worth of income saved up to protect you credit card debt and other bills in a disaster. This will prevent you from incurring penalties for using 401(k) funds early, and stop high credit card balances from mounting against household expenses if your income is endangered. Once you’re comfortable with the amount of cash you have on hand, increase your 401(k) contribution; to the maximum, if practical. This helps offset the damage from losing contribution matching.

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