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.
