401k plans suffer with credit squeeze

Posted 8/7/09

Businesses looking to cut costs in favor of fewer layoffs have resorted to reducing some fringe benefits. The most popular result is eliminating the …

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401k plans suffer with credit squeeze


Businesses looking to cut costs in favor of fewer layoffs have resorted to reducing some fringe benefits. The most popular result is eliminating the 401k employer match. One in three companies has reduced or eliminated employer contributions, according to CNBC.

The Report on Retirement Plans – 2009 explains the ramifications of the credit crisis on employer-sponsored retirement plans. The reduction of employer dollars along with losses in 401k accounts has led many workers to believe retirement is out of reach.

Last year, several major corporations including FedEx, Ford, General Motors, Kodak and Motorola cut 401k matches. This causes the employee to be less motivated to put their own money away in a volatile investment arena if the employer incentive is gone.

This year, according to the report, 46 percent of employers are considering making changes to their retirement plans. Some may freeze the pension plan in favor of the employee funded 401k option; some will reduce or eliminate the employer match; some will reduce investment options or look for a less expensive plan.

Existing plans are likely to offer fewer investment options than in the past. This is another cost-cutting measure. The report showed an increase to 33 percent of plan sponsors offering only five fund choices in the 401k plan. Typically these are low-cost index type funds or asset blended funds designed to mature at a target date for retirement. These often provide a novice investor a way to get into markets without a lot of expense or research.

The 401k plan remains the most common retirement benefit offered today, largely replacing the old defined benefit plans fully funded by major corporations for long-term employees. Today, with job mobility there is more pressure on the worker to fund his or her retirement.

The 401k or defined contribution plan allows any eligible employee to contribute and reap the benefits these plans offer over self-investing:

low-cost way to invest,

low minimums allowing small investors a resource to contribute, and

pre-tax contributions reducing the dent on the take-home pay.

2009 IRS limits allow up to $16,500 with another $5,500 for workers older than 50. For some households this may be a substantial investment.

The recession has certainly taken its toll on retirement plans for many. However, reducing your own contribution may not be wise, even if your employer has suspended their contributions for awhile. With fewer pensions and more pressure on Social Security, the 401k plan may still be the best source of retirement income in the future.

I have no doubt many employees will need to work longer and fund more into their retirement plans due to the recent credit crisis and the domino effect of the recession and market decline. However, since 401k plans are funded largely with employee dollars, this is one area you have some control over. How much you contribute and where you choose to put your investment can make a significant difference in your retirement planning compared to those who do not take advantage of these plans at work.

We have only four months left to maximize contributions for 2009. Consider increasing your contributions to the maximum every year. Consult with your adviser for investment options to help you achieve the best retirement you can in this environment.

Patricia Kummer has been an independent certified financial planner for 22 years and is president of Kummer Financial Strategies Inc., a registered investment adviser in Highlands Ranch. She welcomes your questions at www.kummerfinancial.com or call the economic hotline at 303-683-5800. Any material discussed is meant for informational purposes only and not a substitute for individual advice. Investing is subject to risks including loss of principal invested.


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