401(k) Matches Slashed: 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. Since the COVID-19 pandemic and subsequent economic downturn, some employers have already suspended their corporate match to employee 401(k) contributions.1 In the months following the crash that led to the recession of 2008-09, about 18.5% of employers that offered a match suspended or reduced their amounts.1
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 find themselves suddenly funding their retirement on their own for the foreseeable future? What guidance might an experienced financial advisor offer to clients who are concerned their employers might soon suspend their 401(k) matching programs?
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. Because 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 soon be discontinued — all the more reason to take advantage now.
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. For 2020, the IRS increased employee contribution limits to 401(k), 403(b), most 457 plans, and the federal government's Thrift Savings Plan to $19,500, up from $19,000. For employees over 50, the annual limit for catch-up contributions was increased from $6,000 to $6,500 for 2020.2
Review Their Retirement Savings Plan
For clients whose employers have suspended matching contributions, it may be time to take a close, comprehensive look at their retirement plans to evaluate whether the employer 401(k) plan remains the best place for their own contributions. 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.
Delay Major Purchases
While markets have shown signs of recovery, we’re not out of the water just yet. Volatility remains and it’s impossible to predict whether or when another wave of the pandemic may strike. Businesses may have to shut down again and the recovery that we have seen may be reversed. When job security and markets are both uncertain, it’s prudent to hold off on major purchases, especially those that require additional debt. Even though currently low interest rates are very tempting and lenders are offering attractive deals, an experienced advisor may caution clients to avoid unnecessary risk and the potential pain that could follow, should they experience job loss or other hardships.
Take a Good Look at Portfolio Diversification
A comprehensive review of all retirement income sources can help clients really 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 and pension payments (if they’re fortunate enough to have a pension), 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.
It’s difficult to overestimate the value of retirement peace of mind, especially in an uncertain financial climate. Current market volatility might leave investors feeling uneasy about their financial futures, and experienced advisors may help reduce that stress by helping their clients identify sources of protected lifetime income, including annuities.
Use our tip sheet to help answer questions your clients may have about annuities and guaranteed income. Simply click the link below.
1CNBC.com, Employers may drop 401(k) matches as companies look to cut expenses, April 2, 2020.
2IRS.gov, 401(k) contribution limit increases to $19,500 for 2020; catch-up limit rises to $6,500, November 6, 2019.