Subscribe to this Blog401(k) cuts now mean pain later
Whether or not the 401(k) is the nation's best-designed retirement savings vehicle, for most people, it’s the only retirement plan they’ve got. Unfortunately, the most compelling feature about the 401(k) — the matching contribution from your employer — is disappearing fast. To save money, one-quarter of U.S. employers have eliminated matching contributions to employee 401(k) retirement plans since September, according to a recent survey of senior finance and HR executives by CFO Research Services and Charles Schwab.
Just how much does a company save by eliminating that benefit? Hewitt Associates ran the numbers in an April survey. For a company doing the typical match (50 cents for every dollar an employee contributes up to 6% of pay), the cost savings is about $1500 per worker. That can add up to a lot — anywhere from $2 million for a small company to $25 million for a large firm, Hewitt says.
This isn’t a new play. In past downturns, companies have been quick to cut their 401(k) matching contribution and have later restored the benefit when the economy improves. But that move takes a big toll on workers’ bottom lines at a time when they can least afford to take another hit to their retirement savings. Even a short-term halt in that contribution can have a long-lasting negative effect on your retirement savings. That’s because once the match is suspended, many employees reduce their own 401(k) contributions or even stop contributing to their plan entirely. As a result, employees' retirement savings shrink by thousands of dollars. For example, younger workers earning $50,000 a year who contribute 6% of their salary will have $16,000 less for retirement than what they would have had if their employer hadn't suspended their match for one year. That loss jumps to $48,000 if employees stops contributing during that year as well. While they may eventually start saving in their 401(k) again, Hewitt finds even a hiatus in savings of just a few years can deplete retirement savings by hundreds of thousands of dollars. For example, a younger worker earning $50,000 a year who stops contributing 6% of his or her salary for five years can have up to $150,000 less for retirement.
Clearly, just because your employer no longer kicks in to your retirement plan doesn’t mean you should stop too. Remember, your 401(k) is still a pretty good deal even without a company match. You get a big tax advantage by putting pre-tax dollars away for retirement, which lowers your current taxable income. And you don’t pay taxes on the gains in your plan until you begin withdrawing the money at retirement, which effectively gives you a higher after-tax rate of return than if you were in a taxable investment account. Sure, you can get similar tax advantages with a Roth or deductible IRA but you can only sock away $5,000 a year with those. With a 401(k), you can save up to $16,500 pre-tax in 2009. You can’t discount the convenience of having your retirement investments taken directly out of your paycheck either.
As for your employer, Hewitt suggests some other actions for companies to take to cut costs before slashing their company matches, including shopping around for funds with the lowest expenses and getting rid of costly printed materials which duplicate information found on company websites. For a thoughtful take on how 401(k) plans can be improved, read this piece by my colleague Penelope Wang.
Rex,
You're doing exactly the right thing. I did it for many years. I happen to have a pension benefit as well, but saving money in my 401(k) over they years like you are is even more valuable. I don't know what some of these folks are thinking. Entitlements I guess.
Save at least $20,000 per year for many years, let it compound, and be happy when you're retired at 50!
Otherwise count on the bankrupt Social Security system for your retirement. In that case, good luck!
Here's a reality check for all those like myself who are about to turn 30. Don't look at average stock market returns to estimate what you will have at retirement. I believe we will set the bar for some of the worst returns for a 30 year period. Lets put some numbers to this. Lets look at a large employer who provides the following 401K investment options:
VIIIX, GESSX, GESLX, GSIVX, GIEIX, GSVIX, GE.
http://www.fundadvice.com/401k-help/401k-plans/401k-general-electric.html
I started working in Aug of 2001 after the summer off. So if you look at the share prices on 8/1/01 (which are significantly lower than if you started working right out of school in June) and compare them to yesterdays closing price the result is a 25% loss. To put this in perspective, assume you received a 50% match from your employer and had 150 shares of each option in your portfolio on Aug 1, 2001. Your initial investment was $24400 with the matching contribution of $16177. The TOTAL value today would be $24265.50. That’s a loss of 134.50 compared to if you had opted out of the plan and stuck it in your mattress for the last 8 years. Did I mention that $16,177 employer match was totally wiped out?
So obviously this is an over simplistic example given the fact that one accumulates these shares throughout the year. The takeaway is that if you assume a 30 year investment period, your investment has shown no growth for the first third of that time. Talk about starting in the hole.
I wish I had a good answer regarding where a good place to park my savings is. When the impending jump in inflation occurs, that will further erode any savings we have. The 401K plan is slightly better than going to Vegas. Maybe I should have parked all my cash in bonds since that was the only option that has made money. However I never met any financial planner who told a recent grad to invest 100 bonds. For now I’ll keep buying stocks in the hope that they do eventually rebound. Once that happens I think it will be time to move to low risk. I’d be interested to hear how other peoples portfolio has fared over the last 10, 20 or 30 years.
"If your angry that your 401k lost value, you are failing to recognize that you chose the investments. YOU allocated the funds in your 401k, so look in the mirror and yell at yourself. Over exposure to stocks is why so many people lost so much."
True, but the entire market was sideswiped by a handful of greedy bastards, appeased by 8 years of Bush admin inaction
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Pretty wishful thinking. If you lost 40-50% 9or more) that means having to realize gains of over 100% just to get back to 2008 levels. Years and years of recovery, assuming good market conditions-maybe 7 years. And then you have to talk about the opportunity cost lost in those 7 years…
Correction :
In the example of the 50% contribution to your 401k ; as you move closer to retirement gradually move more of the 20% of money out of your plans funds to the 30% that's in fixed income . You will be increasing your contributions and eventually maxing out your savings which is what I did before I retired . I contributed before taxes meaning more money in the " kitty " . I draw a monthly pension which I pay my monthly expenses out of . ( less than $2,000.00 a month ) . It helps to have no cc debt before you retire . Also get rid of any " dead weight " expenses that you don't need . I hope to let my 401k set in my employers plan for 10 years until the age of 70 1/2 . The interest will continue to build . With all said I'm still able to have a comfortable retirement and live within my means .
I tell you it is time for people to stop complaining to take things under their control instead of looking for handouts from everyone. I would much rather receive no match, and have control over my investments than receive a match and be told where to invest it.
Also, while the past year has been rough, because I continued to add new money as the market was falling in Febuary and March, my 401k is nearing its peak value. Dollar cost averaging worked well in both the 401k and my IRAs. I purchased some really good companies at super cheap prices and was able to sell enough shares to get my original investment back and then some and let the remaining shares ride. In some cases it was nearly half the shares purchased that I still am riding at no cost to me.
I don't get the entitlement I'm sensing in some of these posts.
As I see it, if you do good work and add value to your company, you are entitled to receive pay for your work.
If your angry that your 401k lost value, you are failing to recognize that you chose the investments. YOU allocated the funds in your 401k, so look in the mirror and yell at yourself. Over exposure to stocks is why so many people lost so much.
Yes, my investments lost money too. Because my investments are for retirement, my account value won't be relevent until I am ready to draw on those accounts 20 years from now.
You can bet my allocations 10 years from now will be different than they are today. 20 years from now they will be vastly different than they are today.
I fully expect to have amassed over a million dollars within 10 years and over 2 million by my retirement date. I'm not counting on any Social Security, so that will be an extra bonus if it is still around.
I max out my 401k ($16,500 per year) and my Roth IRA ($5000 per year). This takes sacrifice.
The lower the stock market goes, the more shares you are buying. Stocks are on sale right now. Think of it this way…If the car you want to buy drops in price by 1/3rd, would you buy it or would you stop looking at cars because the price is going down?
A great time to buy is when the stock market has tanked, not when it is flying high.
In a few years, everyone will be talking about how great the stock market is doing and the memories of this market correction will begin to fade.
Where are the DemonCrats saying this is all Bush's fault? We are given free money that is tax free until we need it. If our company wants to save jobs by cutting out the company match, THANK YOU for saving my job !!! I will use my own money to save for my retirement. If my company goes out of business, I still need to save for my own retirement. If you can't see this, Walmart always needs greeters.
David,
There are 401(k) limits because the government does not want you to be able to escape too much of your tax bill. The "after tax thing" you refer to has not been eliminated, either.
As for the rest of you, I'd love to know how many of the 401(k) haters screwed up their accounts by getting in and out of the market or taking too much or too little risk.
My guess is that there is a lot of misplaced anger coming out on this blog.
Mike StL,
My 401(k) earns 5.6% every month in fixed income returns right now. The balance has never declined in any month. Twenty years ago it was double digit returns. Including the 6% employer match, I have easily earned well over the 7% you claim is unheard of. It is unfortunate your experience is not the same, but don't say nobody makes a 7% return. I made much more than that over the years.
Just wondering, do 401k contributions reduce the amount of social security you would be eligible for — assuming you make less than the $90,000 cap? After investment losses, low gains, inflation, and fees how much is eroded on average? Also, many companies don't fully vest someone in a plan for years. However, investing in a plan is much better than doing nothing.
If the 401k costs only 25 million for large firms and CEOs are getting around that much in bonuses or more, why don't companies start with the easiest way to save money that effects the least amount of people by cutting some executive bonus packages……. but no why would we do that they need the money so much more.
two questions #1 why are there limits to investing in a 401k.does a bank limit how much you put in it nooooooooooo.question #2 why did the government remove the option of the after tax thing.answer for this one is simple,they would rather tax you on the whole amount rather than the year to year amount.
Since employers have discontinued funding their employess retirement , there is a lot of confusion as to how employees are to use the Hewitt web site to their advantage and still build a descent financial future . You can contribute a portion of your paycheck to your 401k but you don't have to put all of your contributions into the stock market . For example ; if you were to contribute 50% of your paycheck distribute 20% among your employers funds . Save the other 30% in the stable value fund . That 30% of your money is being saved and protected from any possible market downturn . The stable value fund is your savings vehichle . As you move closer to retirement decrease your exposure to your plans funds by moving more of the 30% of money into stable income . That money will grow over time . The reason there is so much confusion is that many participants haven't been correctly educated on using the Hewitt site . The way that I learned how to use the site was to read the imformation out there . Unfortunately I didn't start saving for retirement at a young age . Most of the 1/4 million that I have I built over a ten year period . I have retired and haven't had to withdraw any of my savings from the plan . If your employer discontinues to match your contributions please continue to contribute to your plan . It's your money and your future .
Of course, analysts love the 401(k), because it means the managing of millions of individual accounts, which means millions in commission$ for plan administrators. I think this was the real motivation behind the scheme to partially privatize Social Security also.
7% a year,HUHHH!! I have kept records. My 401K has earned 4% annual over the last eleven years. It was much higher until October 2008. Thank God I still have a defined benefit pension plan (or the Federal Pension Guaranteee equivelant). But my kids won't have the cushion of that defined benefit pension.
Mike,
How is the 401(k) the biggest employee rip off of the past 100 years? Your job gives you free money to invest in the stock market so that YOU can take care of YOUR retirement needs? I know that in the first 3 years of working I had amassed over $25K in my 401k, how was I getting ripped off? It's also funny because as much as people complain about this company and that company making money hand over fist, why not get a piece of the action by owning shares in solid companies?
A problem I find with 401k is research like Hewitt's that do not paint a clear picture. How can an employee earning only $50,000 who contributes zero to the 401k, which leads to de facto zero company match, result in $48,000 less in retirements savings?
Hewitt is making us read around in circles and determine that at 6% contribution plus company match he would have nearly doubled his salary in 401k savings in order to have had $48,000 loss. The assumptions Hewitt uses are a disservice.
I have come to believe the 401k is just another form of control – something shiny to mask the fact that companies have abandoned their responsibility to take care of the employee after a long service (ie their pension). Its self perpetuating, and artificialling inflating. My god, were actually PAYING people for the opportunity to use OUR money while were not using it! Horde your money for yourselves, and make your company give you REAL benefits!
MadEnuff – You obviously have no idea what a pyramid scheme is.
Mike in StL – A rate of return of 7% is actually fairly conservative over a long period of time. Defined benefit pensions are NEVER coming back. Besides, when a company decides they no longer want to honor that obligation, they just declare bankruptcy, and your pension goes away just like that. Ask the airline pilots. You want that instead of something you control? The worst that can happen to your 401(k) from a company standpoint is they stop the match.
You make a broad assumption that $6,000 ($3,000 employee + $3,000 employer) will actually earn $10,000 in 30 or 40 years. With the economic torment of the last 18 months, plus all the various "bubbles" that have affected the markets in the 90's, the 2000-2001 Tech bubble, 9/11, it has only created greater uncertainty in the markets… and yes, all of a 401(k) is worth 20-40% less that what it was.
But none of this would have been possible if Executive Compensation had been kept in check and financial managers hadn't been taking out their cut first before actually managing peoples lifetime retirement funds. "Sure, I may have lost 35% on my portfolio… but look at the $10million in fees & commissions I generated!"
The incentive to save has been utterly lost. Those of use prospecting retirement in the next 30 years can forget it because the "me" financial generation stole it from us.
My solution: Personal savings accounts for United States citizens only, with a guaranteed prime lending rate + 1% return, backed by the Federal government, that can only be invested in simple savings accounts. Each individual entitled to $100,000 worth of deposits. That simple 5% (or more) earned is completely free of federal, state, or local taxes. Money can be deposited or withdrawn at any time for any reason. But this will be the first source of savings for all individuals… not CD's… not money-market accounts… not any savings account subject to income tax, not subrate mortgage borrowing and not credit card purchasing. And when folks have an emergency, they can use money from this account, and not have to borrow.
Banks would be subject to complete scrutiny and regulation and guarantee that this capital is used for safe investments.
Americans need to get back to savings that make sense!
Uh, Mike? Now that I'm hear, you know at least one. Until the meltdown I was around or above that.
Sure, I'm not there anymore, but I expect in 2 years I'll be back to 7% or so.
Investing in stocks isn't a pyramid scheme. SS, Pensions, THEY are pyramid schemes where new money pays old investors. THAT'S a pyramid scheme.
Look, investing in stocks is risky, if you can't handle it, don't do it. Or invest in bonds.
Well in their defense, these analysts are just telling us what history has already shown us. 401k's does provide wealth.
I am just about tired of hearing analysts pump up the 401(k). It is the biggest employee rip off in the past 100 years.
My favorite is the comment by the author of how a young worker would lose 150k by missing 5 years of contributions. That is assuming a 7% average rate of return. I do not know of one person whose 401(k) has averaged 7%.
Bring back the defined benefit plans.
Brought to you by the "pyramid scheme" people needing you to continue contributing to bolster the prices of their retirement stocks!
This article summarizes some of the issues. But, keep in mind that the trend is for employers to keep cutting back on retirement (defined benefits went away, and defined contributions like 401k are going away), health insurance (it's getting much too expensive), and jobs (offshoring is accelerating). So, we'll have a very different economy in a few years.
The core of your retirement will be Social Security and Medicare: they can't be cut or offshored by your employer. They'll need to be beefed up, and Congress will do it, probably by raising or eliminating the salary cap, maybe supplemented by a carbon or import tax. This is not rocket science. Social Security and Medicare will be alive and well long after Wall Street is dead and gone.
You should supplement your retirement by contributing to a 401k (if it's available) or an IRA (you have much more control, so it's preferable to a 401k). It's very important to have cash and bond components in your retirement accounts. Make sure that the cash is really 'cash' (FDIC) and that the bonds are really 'bonds' (Treasuries, such as GNMAs and TIPS). It's OK to have stocks, but these should probably not be more than 50% of your account, as they're much to volatile for retirement funds. You can buy stocks when they're really cheap (maybe now, but we're not sure), but you have to remember to sell them when they get pricey (like 2000 and 2007), otherwise, you'll lose all of your gains during the recurring crashes.
Stick with regulated mutual funds (there are many choices). Stay away from unregulated investments (like Bernie Madoff, Sam Israel, Allen Stanford … there are LOTS of them).
The brave new world of retirement: you can't retire on real estate and stocks any more: they're too unstable and unreliable. Bonds and cash are the new core holdings for retirement savings.