The news has not been good for company retirement programs lately. Let's start with Hostess. The now bankrupt makers of some of our favorite childhood treats like Twinkies and Ho-Hos acknowledged that it used employee wages slated for their pension plans to fund company operations. Sound illegal? It is not. It's unethical, according to the Wall Street Journal, but not illegal since the funds did not come directly from employees. Still, the likelihood that the pension funds will be restored is slim.
Although not as incomprehensible as the actions of Hostess, IBM did something with its 401(k) plan that caught the eye of employees in a not-so-morale-boosting way. It announced that, starting in 2013, it would no longer match 401(k) contributions at every pay period. Instead, there would be one large payment into employees' accounts on Dec. 31 of each year. IBM also said that an employee, who leaves the company prior to Dec. 15, would not receive a match payment.
Minor details, right? Not really. Forbes correctly points out that employees will no longer have that money working for them throughout the year. Instead, IBM, a company that contributed $875 million to 401(k) plans in 2011, will be the beneficiary of investment gains on the funds. Second, IBM now has incentive to lay off or fire employees before that Dec. 15 date. Nobody is saying it would do that, but it could.
It's nice to think the Hostess story is rare, but what about IBM? If you have a company-sponsored retirement plan, the company has a large degree of control over your retirement planning. When your employer cuts your 401(k) match, that could potentially delay your retirement or force you to contribute a higher percentage to your plan.
In addition, IBM is considered a trendsetter when it comes to employee retirement plans. If IBM makes a change, other companies are sure to follow. With these stories in mind, we put together a few tips for minimizing the damage of such events.
Fund it Now
You have likely heard that you should fund your 401(k) up to the company match. If you are not doing that, change it today because this is one of the best ways to maximize your 401(k). Your company may not follow IBM's lead, but if it does you want to get as much of the company match as you can before it changes the program.
If the Company Changes its Plan, Change Yours
Most 401(k) plans and other retirement programs are inefficient due to the fees that are built into the program. If your company changes the plan, resulting in less of a company match, change the amount you are investing to match the new level. Then, use the funds that were going to the 401(k) and deposit them into an IRA up to the IRS maximum.
New legislation allows 401(k) account holders to see all fees charged through their company-sponsored retirement plan. If you don't understand your 401(k) fees or this new document, ask questions. Ask your employer and a trusted financial adviser if you have one. Minimizing fees is a highly effective strategy for better investment performance. Ask now in order to get a benchmark to gauge how your employer may change the plan in the future.
Rethink Your Retirement Attitude
When many baby boomers were in the middle of their careers, retirement came in the form of pensions. This made retirement planning much simpler than it is now. Today, 401(k) plans are the rule, not the exception. As these vehicles become more employer friendly, employees must increasingly see themselves as the sole drivers of their retirement income. That means cutting household spending and saving more. Do not count on your employer to fund your golden years. It is likely that as companies find ways to cut spending, retirement plans will shrink even more.
The Bottom Line
It's easy to forget that working for a company and receiving retirement funding from them is putting your financial life in the company's hands. Part of that is hard to avoid, but you can substantially reduce your reliance on the company by investing as much as you can as early as you can.