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Your Employer Suspended Its 401(k) Matching During COVID-19. Now What?

According to a recent survey by the Plan Sponsor Council of America, 16.1 percent of employers have suspended matching contributions due to financial hardships caused by COVID-19. Even worse, 1.3 percent of have terminated their 401(k) plans altogether.1 For millions of Americans, their 401(k) and matching employer contributions are a critical component in their retirement planning.

If your employer has recently adjusted its 401(k) options, you would be wise to wonder how this could impact your future retirement – and what  you should be doing about it.

Why Are Employers Changing Their 401(k) Plans?

COVID-19 has had a substantial impact on businesses around the world. With most states in the U.S. implementing stay-at-home orders, businesses have been forced to reduce their hours of operation or close their doors altogether. With Americans encouraged to stay at home from March through May, foot traffic practically vanished across America for months.

Even as states begin relaxing measures and businesses start opening back up, America is still suspended in a fairly volatile market. Because people are worried about what’s to come and they’re strapped for cash, most aren't willing to spend like they used to. As a result, businesses are suffering and searching for ways to save budget. And in times like these, one of the first things to be cut is often employer-sponsored benefits, including 401(k) plans and their matching contributions.

Is it Legal for an Employer to Suspend Matching Contributions?

In most cases, yes. It's legal for an employer to cut matching 401(k) contributions. Even though it may have been an important consideration when you decided to accept a job, employers do have the legal ability to simply stop offering this benefit. The most important thing an employer can do in this instance, however, is to effectively communicate with employees who will be affected by the change. For example, explaining that cutting these benefits is their solution to avoiding layoffs will likely make employees more understanding and receptive to the change.

If your employer doesn’t explain their reasoning behind the decision or give you an idea or let you know if and when contributions will start up again, ask your manager or talk to the HR department. These are important questions that your they should be willing and able to answer.

If your employer offers contribution matches to a safe harbor 401(k) plan, they must offer notice to employees 30 to 90 days before suspending contributions.2   

What Should You Do if Your Matching Contributions Are Suspended?

In the case that your employer does suspend matching contributions, there are several steps you can take toward maintaining and growing your retirement savings.

1. Resist the Urge to Panic

When an employer suspends matching contributions, even if it’s only temporary, it's a sign of the times. We’re dealing with a global pandemic, the stock market’s difficult to predict, and people are anxious about money. You may even be wondering if you should drain the account and keep that money under the mattress instead. If so, you’re not alone. In fact, if you’ve been personally impacted by the coronavirus, you're allowed to withdraw up to $100,000 without penalty, thanks to the recently passed CARES Act.3 

The truth of the matter, however, is you should be making decisions about your money objectively – not by following gut reactions and emotions heightened by media reports. Withdrawing any amount from your 401(k) now only robs your future retirement. So, unless you’re in dire need of financial help, this option should be avoided except as a last resort.

2. Ask Your Financial Advisor For Input

Your advisor’s has one responsibility: to help you make unbiased, educated, and objective decisions about your money. Use him or her as a sounding board and talk about your concerns, as well as discussing potential paths forward. How will you make up for the missing contributions? How will this change have a financial impact on your future retirement? You likely have a lot of questions regarding this change to your 401(k), and talking to your advisor is the best place to start.

3. Revisit Your Portfolio & Other Retirement Accounts

We are in a volatile market and confidence in the economy is low among investors. Use this time as an opportunity to review your current asset allocations and investment strategies. Your financial advisor may be able to help you identify potential areas for improvement based on your current risk tolerance.

4. Increase Your 401(k) Contributions

Even if your employer has eliminated or drastically reduced matching contributions, that doesn’t mean you can’t still contribute to your 401(k). If you're financially able to do so, consider upping your contributions, at least temporarily, to help offset the loss of any missing contribution matches. After all, you may be spending less money on activities like gas, entertainment, eating out, and shopping. Consider putting those dollars in your 401(k).

Remember, the limit on contribution to a 401(k) increased  to $19,500 for 2020. And if you’re 50 or older, you can contribute an additional $6,500 in catch-up contributions.4

Finally, if your employer suspended its 401(k) matching contributions, there's a good chance that it's a temporary cut in benefits. Even so, every penny counts when it comes to preparing for retirement. Talk to your financial advisor so you understand how this may affect your future retirement earnings and what you should be doing right now to make up for any losses. 

  1. https://www.psca.org/sites/psca.org/files/uploads/Research/snapshot_surveys/CARES%20Act%20Snapshot%20Summary.pdf
  2. https://www.irs.gov/retirement-plans/mid-year-changes-to-safe-harbor-401k-plans-and-notices
  3. https://www.congress.gov/bill/116th-congress/house-bill/748/
  4. https://www.irs.gov/newsroom/401k-contribution-limit-increases-to-19500-for-2020-catch-up-limit-rises-to-6500
About the author: Financial Advisor Kyle A. Davis is a Chartered Financial Consultant® , Chartered Advisor in Philanthropy® , and president of Integrity Financial Group in Orlando, FL. He is a Florida  native and an advocate for financial literacy and practical money  education. When not assisting clients in planning for retirement, he  creates educational videos on financial wellness on his YouTube Channel -  https://www.youtube.com/user/financialplannerinfl
This content is developed from sources believed to be providing accurate information. The information in this material is not intended as investment, tax, or legal advice. It may not be used for the purpose of avoiding any federal tax penalties. Please consult legal or tax professionals for specific information regarding your individual situation.

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