The top goal of all investors is to see their investments grow. After a brief hiatus, one way you can assure yourself of a big gain right out of the gates is back -- and if you can, you should make sure you take advantage of it.
Your perfect match
Employer-sponsored retirement plans such as 401(k)s have had a tough time over the past two years. After a five-year bull market, 2008's big stock market drop sent 401(k) balances into the basement, throwing into question the entire premise behind allowing workers to manage their own retirement nest eggs.
Adding insult to injury, scores of companies gave up their support of their employees by dropping or suspending matching contributions. Under those provisions, for every dollar you put into your 401(k), your employer adds some more money on top -- typically ranging from $0.50 to $2 -- up to a certain limit. When those matching contributions went away, it made 401(k) plans look a lot less attractive -- and only heightened the debate about whether 401(k)s really worked as a viable option for retirement savings.
The comeback kid
But now, the tide is turning. According to a recent study from Hewitt Associates, fully 80% of the companies that reduced their 401(k) matching in recent years plan to reverse course and restore their matches. FedEx (NYSE: FDX ) , American Express (NYSE: AXP ) , and Ford Motor (NYSE: F ) are among those who've already done so, effective Jan. 1.
Unfortunately, not all companies are joining the matching bandwagon. Exelon (NYSE: EXC ) , for instance, recently cut its match from 5% to 3% amid continuing financial challenges. Honeywell (NYSE: HON ) also cut its matching contributions by half late last year.
Has the damage been done?
Perhaps more importantly, workers may well steer clear of making 401(k) contributions even when their employers start offering matches again. Just knowing that a company might well change its mind and take away matching contributions makes workers less confident about their employer's commitment to supporting their retirement savings.
Moreover, matching contributions from some employers come with a catch: If you leave your job, you may be forced to give up some or all of what your employer kicked in on your behalf. For example, while Microsoft (Nasdaq: MSFT ) provides for immediate vesting of your entire 401(k) -- even the employer contributions -- things are different at Caterpillar (NYSE: CAT ) , where workers have to have at least three years of service to avoid forfeiting employer matches and profit-sharing contributions if they leave the company.
Add to that ongoing concerns about hidden fees and a lack of good investment options within many plans, and it's a wonder that anyone uses 401(k) plans at all.
It's still worth it
Nevertheless, if your employer matches contributions, that typically outweighs any reservations about your 401(k) plan. Think about it: How many times do you get a chance to earn an immediate 50%, 100%, or even 200% return on your money without any risk at all? That's what a matching contribution essentially is: free money that can dramatically reduce the amount of time it takes you to reach your financial goals.
In addition, for those who want to maximize the amount of retirement savings they have, 401(k) plans let you set aside a whole lot more of your money than alternatives. IRAs have an annual limit of $5,000, or $6,000 if you're 50 or older. Compare that to a limit of $16,500 for younger investors, rising to $22,000 when you turn 50, for 401(k) plan contributions. With 401(k)s giving you more than three times the saving capacity of IRAs, dedicated retirement savers really need the 401(k) as part of their retirement investing arsenal.
So if you have money to invest today, the first place you should think about putting it is your 401(k) plan. By making sure you contribute at least enough to take full advantage of employer matching, you won't leave free money on the table.
Find out what steps you should take to shore up your retirement prospects.