What Should You Do If Your Employer Suspends Your 401(k) Match?

Dear Carrie,

My employer recently stopped offering a 401(k) match. I've always tried to contribute enough to get the entire match, but now I'm in a bit of a cash crunch and wonder if it makes sense to keep contributing. Is it still worth it?

—A Reader

Dear Reader,

You've probably heard me say many times that specific financial advice depends a lot on your individual circumstances. And this is one of those questions that certainly fits that category.

The pandemic has had a major economic impact on employers as well as individuals. According to a national survey by the Plan Sponsor Council of America, more than 20 percent of large organizations had already suspended matching 401(k) contributions as of April. So, you’re not alone and I’m quite sure millions of Americans are asking themselves the same question.

To me, saving for retirement should be a universal priority. The beauty of a 401(k) is that it offers tax advantages and makes regular contributions seamless. Having a match on top of that is icing on the cake—but not having it doesn’t negate the other benefits.

But here's where your own circumstances come in. When money is tight, you may have to rethink and reprioritize. You don't want to jeopardize your future, but you also don’t want to make imprudent decisions like racking up a huge credit card bill or defaulting on other commitments in order to continue contributing.

On the other hand, if your budget still allows you to make regular contributions, you definitely should. In fact, as counter-intuitive as it may seem, now could be the time to increase your contribution to make up for the lost match. (It's possible you’ve been under contributing all along!)

It's kind of a balancing act. So before you make a decision, there are a number of things to consider.

Start with these questions

While your present situation always impacts the way you plan for the future, in times like these you may need to take an even closer look. For instance:

• How stable is your job? When the company you work for, whether large or small, is looking at its balance sheet to find ways to economize, you want to be realistic about the future of that company. Are there layoffs ahead? A cutback in hours? If you think your position could be impacted, now's the time to make sure you have enough cash on hand to make it financially if your job situation changes. Which brings me to the next point.
• Do you have an adequate emergency fund? Today's uncertainties have brought the importance of emergency funds front and center. The standard recommendation to have enough cash easily accessible to cover three-to-six months essential expenses may even be an understatement. If your emergency fund is less than adequate, building it up should be a primary focus. Look at your budget. Can you redirect some dollars to this important fund? If there's no other way to do it, you could reassess how much you're currently contributing to your 401(k) in order to balance present financial stability with future security.
• Have your savings to date been adequate? A common employer match is 50 cents on the dollar for the first six percent of your salary. This means that if you’ve only been contributing up to the match, you’ve been contributing nine percent between you and your employer. That’s good, but below the 10-15 percent that I recommend for someone in their 20’s (an older person just beginning to save may need to contribute even more). If you're behind in your savings already, you’ll likely have to work even harder in the future to catch up.
• How close are you to retirement? This is a crucial question. If you're far from retirement, you may feel like you have plenty of time ahead to save. But the reality is that the earlier you start saving—and the more aggressively you save—the more time you have to benefit from potential market appreciation and compound growth. Stop saving now and you've lost the power of time. Conversely, if you're close to retirement and still have a way to go to meet your savings goal, every dollar you save now is essential.

There’s more to it than the match

While getting an employer match is a definite plus—and an opportunity you never want to pass up—there’s more to it than that. Yes, stopping contributions or temporarily reducing your percentage would put more dollars in your pocket and potentially help ease your cash crunch. On the other hand, it's a trade-off, not only in terms of your future security, but also your current tax situation.

If you have a traditional 401(k), your contributions are tax-deductible, which lowers your taxable income. Decrease or completely stop those contributions and you potentially increase your tax liability. You also decrease your long-term, tax-deferred earnings potential. If you have a Roth 401(k), you don’t get an immediate tax benefit, but the ability to take tax-free withdrawals in the future is huge.

It doesn't have to be all or nothing

If you need some extra money now for essential expenses or to boost your emergency fund, reducing your contribution (rather than stopping it completely) could make sense in the short term. But promise yourself you'll recommit to saving more as soon as things turn around. Because match or no match, when it comes to long-term retirement saving, contributing as much as you can to a 401(k) is one of the best things you can do.

Have a personal finance question? Email us at askcarrie@schwab.com. Carrie cannot respond to questions directly, but your topic may be considered for a future article. For Schwab account questions and general inquiries, contact Schwab.