The State Of The 401(k)

By Stephen D. Simpson, CFA | July 19, 2011 AAA
The State Of The 401(k)

For better or worse, study after study has shown that workers save more money when they sign up for programs that automatically take part of their earnings and put them in retirement savings programs. The same is also true of automatic withdrawal programs for online savings accounts.

TUTORIAL: 401(k) And Qualified Plans

This makes employer-sponsored retirement plans like the 401(k) program very valuable. When employers elect to match some percentage of their employees' contributions, these programs become even more valuable. With so few people saving additional money on their own, 401(k) programs have become increasingly important and their present and future status should be a major concern for all workers.

Matching Not Exactly Matching the Recovery
Not surprisingly, employers tend to be more generous with benefits when the economy is strong and the competition for quality employees is fierce. In times like these, employers may offer their workers the full matching that is allowed under the law, giving a major boost to those retirement savings. In fact, it is generally seen as abjectly foolish by almost all financial planners not to take advantage of matching - it is effectively the same as getting more pay for the same work.

When the latest recession hit, many employers scrambled to cut costs wherever possible and 401(k) matching was discontinued in many cases. With the economy improving, though, some companies have restored this matching. It is all but impossible to get an accurate number on this phenomenon, but the available data suggests a "lumpy" recovery here. Some companies have gone back to pre-2008 policies, some have restored partial matching (or matching for certain categories of employees), and others have continued to abstain from matching. ("Save as much as I can" isn't going to cut it. For more, see The 401(k) Investor: A Retirement Plan That Works.)

What's The Trend?
The data on the recovery of 401(k) matching may be lumpy, but there are long-term trends still at work here. The bottom line is that countless companies have discovered that happy and well-treated workers are better and more loyal workers. Given that recruitment and retention of quality workers is a major concern (and expense) for almost every corporation, this is not a trivial consideration. Many companies have realized that a few percentage points of 401(k) contribution matching is a bargain relative to the cost of losing good workers and having to replace them.

Employees are getting smarter about the benefits they demand when pursuing a job. True, the current recession and difficult job market have forced many workers to reevaluate their needs and wants when trying to find a job, but the fact remains that many workers have been thoroughly drilled in the importance of employer-sponsored programs like 401(k)s and health reimbursement accounts (HRAs).

In the background, there have been some tectonic shifts in the economic backdrop. The housing crisis may well have reeducated one or two generations of workers on the extent to which a house is a store of savings. Likewise, all of the talk around the solvency and future of Social Security has reemphasized the importance of independent savings for retirement.

Consequently, employment-based retirement plans are likely to become ever more important as part of workers' retirement plans. That is not to say that companies will be universally generous - some companies may well make the strategic decision to take their chances in not offering employer matching for 401(k) programs, or may elect to fund their contribution with company stock. (For related reading, see 401(k) Predators: Don't Become Prey.)

What You Should Do
There is not a lot that an individual can do if a company decides not to offer 401(k) matching (or opts to end it). Certainly it makes little sense to quit a job over this without having a replacement job already lined up. But that is not to say that employees are powerless to make other choices.

For starters, make the most of whatever is available. If an employer offers less matching but still some, by all means take advantage of it. Likewise if a company only offers to match with stock, that is still tantamount to "free money."

Without any sort of matching, employees should consider other options. While automatic payroll deduction is a good idea for most workers even in the absence of matching, the lack of matching may mean it's a better idea to temporarily direct more money towards paying off debt or building up an emergency savings fund. Likewise, employees should explore what options are available in terms of IRAs or annuities - both of which allow people to save money for retirement in a tax-advantaged fashion. (For more on IRA's, see Deducting Losses On Your IRA Investments.)

TUTORIAL: Retirement Planning

The Bottom Line
The United States has not seen a profoundly strong recovery yet, and that shows in the job numbers, the unemployment data and the wage statistics. Perhaps it is not so surprising that in a tepid recovery there has been no consistent trend towards a resumption of corporate 401(k) matching. Still, history is a useful teacher and history says good workers gravitate to companies that treat them well - and companies that went good workers will have to offer the benefits to attract them. (For related reading, see 401(k) Plans For The Small Business Owner.)

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