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The Worst News Yet for Your Retirement

Think you've already got enough trouble saving for retirement? Now, some people are suggesting that companies should consider eliminating one of the most valuable incentives to save in a retirement plan: the employer match.

Frankly, I never thought anyone would find anything bad to say about 401(k) matching contributions. Employees get free money as a bonus for putting their own hard-earned cash into a retirement plan. Businesses reap huge cost savings compared to a traditional pension plan. And matching contributions help companies meet tests that allow their managers and other highly compensated employees take full advantage of tax breaks available to them.

Why pay?
Changes enacted to retirement plans by the Pension Protection Act two years ago now have some wondering whether an employer match still makes sense. In a recent article from the Employee Benefits Research Institute, Lori Lucas, an executive vice president at an employee benefits consulting firm, pointed out that with many employers now using automatic enrollment to get employees to use 401(k) plans, the additional incentive of an employer match seems unnecessary.

To support her claim, Lucas cited surprising research findings from professors at Harvard and Yale: When several companies eliminated matching contributions, their employee participation rates dropped only slightly. The studies concluded that if an employer aims to encourage participation, it may no longer need to offer matching funds.

You're on your own
Those who propose to dispatch employer matches are quick to suggest that the money could instead fund other employee benefits. Making automatic profit-sharing contributions, cutting fees for employees' 401(k) accounts, or enhancing other areas, like health-insurance benefits, are just a few possibilities.

Of course, companies facing falling profits in a sluggish economy may well prefer another approach: pocketing the money themselves. Consider a few of the steps companies are taking to minimize retirement benefit costs:

In the wake of all these cuts in benefits, you have to wonder: If your employer cuts its matching contributions to your 401(k), will you really see any offsetting benefits elsewhere?

Reaching a breaking point
Unfortunately, trends toward reducing employee benefits of all types -- including employer retirement plans -- will likely continue. In a weak economy, workers have little bargaining power to protest what amounts to major pay cuts. Meanwhile, although employees are seeing the purchasing power of their take-home pay fall due to higher food and energy costs, companies with little pricing power can't pass on higher labor costs to their customers, and therefore will likely do their best to hold the line on salary increases.

Even without an employer match, 401(k) plans still make sense for many retirement savers. Yet with their high and sometimes hidden fees and their lack of investment flexibility, 401(k) plans are a lot less attractive without free money from matching contributions. With the nation already in a retirement crisis, adding one more pressure point could prove to be the last straw for those struggling to support themselves during their golden years.

Learn more about retiring rich:

If you want more tips on managing your retirement benefits, check out our Rule Your Retirement newsletter. Every issue features ideas you can use to make the most of your 401(k) plan, as well as other investments. It's all available to you free with a 30-day trial.

Fool contributor Dan Caplinger thanks his former employer for five figures' worth of matching contributions. He doesn't own shares of the companies mentioned in this article. FedEx and Charles Schwab are Motley Fool Stock Advisor recommendations. Anheuser-Busch is a former Motley Fool Inside Value pick. Try any of our Foolish newsletters today, free for 30 days. The Fool's disclosure policy won't touch a thing.


Read/Post Comments (2) | Recommend This Article (5)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On July 18, 2008, at 3:10 PM, TrailerParkJawa wrote:

    Is the match for a 401k really considered an incentive to start the program? For me its alwasy been a benefit. I'd enroll no matter what but I view the match as a part of over all compensation. It is a check mark in the column "whats good about working here" vs "whats bad about working here".

    Last here my company increased its match and I wrote the HR dept to say thats the sort of thing I like to see.

    If they removed the match, it wouldnt cause me to leave on its own, but I'd certainly be a less happy employee.

  • Report this Comment On July 18, 2008, at 3:52 PM, m199413 wrote:

    It's amazing how company officials can "spin" any cut in benefits to make it seem a progressive and wonderful option for everyone. With the elimination of defined benefits packages all the enlightened leaders touted the benefits. Better for the company; better for the employee; greater flexibility for everyone. Now you can save for yourself and manage your own future--and we (the company) will help by giving you a pittance of what it used to cost us for your eliminated defined benefits plan. Now, we aren't even going to give you that pittance. Your on you own guy!! Twenty years from now the country will be in a retirement valley of death that will be worse than the "imagined energy crisis" of today. Luckily, I'll probably be dead by then.

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Dan Caplinger
TMFGalagan

Dan Caplinger has been a contract writer for the Motley Fool since 2006. As the Fool's Director of Investment Planning, Dan oversees much of the personal-finance and investment-planning content published daily on Fool.com. With a background as an estate-planning attorney and independent financial consultant, Dan's articles are based on more than 20 years of experience from all angles of the financial world.

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