Almost 50 percent of employers cutting back 401(k) plans
Jun 22nd 2009 8:30AM
Updated Dec 4th 2009 2:32PM
Most companies do indicate that the cuts are temporary. "Most view that as a temporary step. They don't see that as a long-term approach," Steve Anderson, who heads Retirement Plan Services at Charles Schwab, told Reuters.
This cut back is like a double-whammy for workers, who saw their 401(k)s turn into 201(k)s when the market crashed. Now, when the market is on sale, they have less money to put into their retirement portfolio to position that portfolio for a future market recovery. On top of that, many workers are cutting their 401(k) contributions as well just to make ends meet with credit markets frozen. Others lost jobs and retirement savings are no longer an option.
When people were asked to identify the most important feature of their 401(k), 87 percent of them said the company match was the key aspect of the plans, according to the Schwab study. The second most important aspect was the professional investment advice they got from the plan.
Just yesterday on the radio I heard a financial planner tell listeners that they should stop making contributions into their 401(k) and build a three-to six-month emergency savings as a cushion in these rough economic times. While that's good advice if you're in an industry in trouble, it's not good if you are in one of the more stable industries, such as health care.
I agree that having an emergency savings cushion is important, but cutting out all retirement savings isn't a good idea either. If you have no other extra funds to tap, then you may need to cut back on your retirement contributions to build that savings cushion, but don't stop contributions completely.
Remember the market will go up and down throughout you're working career. The best rule of thumb is to buy low and sell high. Unless you believe this market is headed back down to where it was during the Great Depression, it's a good time to find stocks in well-managed companies and buy them while they are on sale. Continuing regular contributions into a 401(k) makes sense even in bad times.
Schwab's online survey was conducted between March and April among executives at companies with revenues ranging from $100 million to more than $10 billion in a cross-section of industries. More than half of the respondents worked at companies with more than 1,000 employees eligible for their 401(k) plans.
Has your company cut back its 401(k) contribution or limited enrollment to the plan?
Lita Epstein has written 25 books including Working After Retirement for Dummies.