When an employer stops contributing to a 401(k): 5 ways for investors to respond

Many advisors rely heavily on the concept of the employer 401(k) match as “free money,” motivating investors to take advantage of this retirement savings vehicle. But when times are tough, as they’ve been for the last few years while we’ve dealt with the pandemic and its reshaping of the world, some employers might adjust their policies and either reduce or outright cut their contributions to the workplace 401(k).

Potential eliminations or reductions in company matches only underscore the importance of careful retirement planning and place increased responsibility on the individual to save.

So, what advice can you offer clients who may find themselves funding their retirement on their own?

1. Take advantage of the 401(k) match while it’s around

Clients who are fortunate enough to get matching funds should be encouraged to, at a minimum, contribute the full amount that can be matched for as long as they can. Since employees likely experience employer matching contributions as a significant initial return on their investment, those matches may serve as a powerful motivator for participation. Those employees who still have access to “free money” should be reminded of the benefit and the possibility that 401(k) matching contributions could one day be discontinued — all the more reason to take advantage now.

2. Max out employee 401(k) contributions

Even better, clients may go a step further and max out their contributions as they are able, increasing the percentage of their salary they contribute and accelerating their savings to potentially take advantage of market dips. The employee contribution limit for 401(k) plans is $22,500 in 2023, up from $20,500 in 2022.1

3. Review their overall retirement savings plan

It may be time to take a close, comprehensive look at their retirement plans and accounts to evaluate whether the employer 401(k) plan remains the best place for their contributions if their employer stops matching. Employer plans typically use a one-size-fits-all approach — the same plan for all employees, regardless of individual differences — and some retirement plans may not perform as well as others. Exploring alternative savings vehicles may reveal opportunities such as individual IRAs that may bring in greater returns as part of their long-term investment strategy.

4. Consider delaying major purchases

In volatile and uncertain times, it’s often ideal to hold off on making major purchases (especially those that require taking on additional debt) unless absolutely necessary. So, if a client has found a major resource of their retirement income cut off, it may be in their best interest to wait until there’s more stability and a better savings stream again to buy that house or pony up for that new car.

5. Take a good look at portfolio diversification

A comprehensive review of all retirement income sources can help clients envision their individual situation and make well-informed investment decisions. It’s understood that investment returns can fluctuate, but for many clients whose baseline needs may not be met by their guaranteed income streams, including Social Security, a diversified strategy including annuities may provide the additional peace of mind that can come with supplemental guaranteed income.

Clients may choose from innovative annuity products that offer an “income floor” which may help limit loss potential at a level that’s comfortable for them, while still enabling them to benefit from market gains. In addition, annuity payments may help clients avoid spending down their invested assets in retirement and more effectively stretch their returns over the long term.

Income for life

It’s difficult to overestimate the value of retirement peace of mind, especially in an unsettled financial climate. The upheaval and uncertainties over the past few years might have left investors feeling uneasy about their financial futures, and experienced advisors may help reduce that stress by assisting their clients with identifying sources of protected lifetime income, including annuities.

Marshall Heitzman
Written by: Marshall Heitzman, CFP®, ChFC, FLMI, CPCU, BFA™

Marshall is TruStage's Advanced Planning Expert and has more than 25 years of experience in the insurance and financial services industry. He consults Financial Professionals on advanced retirement planning concepts for retirement and wealth management clients.

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