According to a recent survey by the Plan Sponsor Council of America, 16.1 percent of organizations have suspended matching employer contributions due to financial hardships caused by COVID-19. Worse yet, 1.3 percent of businesses have terminated their 401(k) plans altogether.1 Millions of Americans rely on their 401(k) and matching employer contributions to bolster their savings for retirement.
If your employer has recently made an adjustment to its 401(k) offerings, you may be considering how this could impact your future retirement - and what next steps you should be taking.
Why Are Employers Changing Their 401(k) Plans?
COVID-19 has had a tremendous impact on businesses around the world. With most states implementing stay-at-home orders, businesses have been forced to reduce hours or cease operation altogether. With Americans encouraged to stay home throughout March, April and May, foot traffic all but vanished across America for months.
Even as states begin relaxing measures and stores start opening back up, America remains suspended in a fairly volatile market. People are worried about what’s to come, they’re strapped for cash and not willing to spend like they used to. In return, businesses are suffering and searching for ways to save. One of the first things to go is often, unfortunately, employer-sponsored benefits such as 401(k) plans or their matching contributions.
Is it Legal for an Employer to Suspend Matching Contributions?
In most cases, yes. It is legal for an employer to suspend matching 401(k) contributions. While it may have been an enticing addition to your benefits package upon your hiring, employers do have the power 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 provide you with an explanation or any idea of if/when contributions will start up again, speak to your manager or HR department. These are important questions that your employer 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 in advance of 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 a few next steps you can take to help maintain and grow your retirement savings.
1. Resist the Urge to Panic
Having an employer suspend matching contributions, even if it’s only temporary, is a sign of the times. We’re facing a global pandemic, the stock market’s unpredictable and people are worried about money. If you’re wondering if you’d be better off draining the account and having that money under the mattress instead, you’re likely not alone. And if you’ve been personally impacted by the coronavirus, you can even withdraw up to $100,000 penalty-free as part of the recently passed CARES Act.3
But the truth of the matter is, you should be making decisions about your money with objectivity - not gut reactions and emotions heightened by media. Withdrawing any amount from your 401(k) now will only rob your future retirement. Unless you’re in dire need of financial assistance, this option should be avoided.
2. Talk to Your Financial Advisor
Your advisor’s sole responsibility is to help you make unbiased, educated and objective decisions about your money. Use him or her as a sounding board to voice your concerns and discuss potential paths forward. How will you make up for the missing contributions? What financial impact will this change have on your future retirement? You likely have plenty of questions regarding this change to your 401(k), and talking to your advisor is the perfect place to start.
3. Revisit Your Portfolio & Other Retirement Accounts
The market is volatile and economic confidence is low amongst investors. If you haven’t already, use this as an opportunity to reevaluate your current asset allocations and investment strategies. Your advisor may be able to help you identify potential areas for improvement based on your current tolerance for risk.
4. Consider Funding a Roth IRA
Roth IRAs are an excellent way to accumulate tax free money for retirement. Since money goes into a Roth IRA after taxes have been paid, when the funds are withdrawn in retirement, there is no tax due. Because of these benefits, you should consider funding a Roth IRA if you are eligible. For 2020, the maximum contribution to a Roth IRA is $6,000 and if you are over the age of 50, you are able to contribute $7,000. Eligibility for Roth IRA contributions depends on your tax filing status and income. For 2020, if you file single or head of household and your Modified Adjusted Gross Income (MAGI) is less than $124,000, then you can contribute the maximum amount allowable. For those who file single and whose MAGI is $124,000-$139,000 you can contribute a reduced amount and for single filers with incomes above $139,000, no contribution is allowed. If you are married and file joint, your modified adjusted gross income must be less than $196,000 to contribute to the limit. Modified adjusted gross incomes between $196,000 and $206,000 will allow a reduced contribution for those who are married filing joint. And with a modified adjusted gross income above $206, 000 individuals who file married joint are not allowed to contribute to a Roth IRA.
Consider talking to a financial advisor to find out if a Roth IRA is right for you.
This content is developed from sources believed to be providing accurate information, and provided by Twenty Over Ten. 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. The opinions expressed and material provided are for general information, and should not be considered a solicitation for the purchase or sale of any security.