The next time a global pandemic rolls around, at least we'll know what to expect. The effort to contain COVID-19 in the U.S. has changed how we work, shop, exercise, and socialize. Even our long-term savings habits might be disrupted as employers look to optimize 401(k) benefits to conserve their own cash.
According to The Wall Street Journal, the coronavirus pandemic has shut down at least 25% of the U.S. economy. Some 80% of U.S. counties are sheltering in place -- and more unnerving is that the counties under lockdown comprise 96% of national output. Companies are struggling to adjust to this new climate and making tough choices in the process.
Some of those tough choices could involve your 401(k) retirement plan benefits. Here are three changes you might see and what to do about each one.
1. Your employer could drop the entire 401(k)
401(k) plans can be expensive to operate, particularly for small businesses. 401(k) administrator Human Interest reports that plans with less than $1 million in assets can cost the employer $5,000 to $10,000 annually plus another $60 to $160 per employee per year.
In this economic climate, some companies might decide to cancel their 401(k) plans entirely. Fortunately, your plan won't disappear overnight. Your employer will send you a notification that the plan is being terminated and on what date.
Upon receipt of a termination notice, your first action item is to decide where you'll save for retirement in the future. A traditional or Roth IRA is a good start. You can contribute up to $6,000 annually in your IRAs, plus an additional $1,000 if you're 50 or older. A traditional IRA taxes you on withdrawals but not contributions, while the Roth IRA uses after-tax money for contributions but gives you tax-free withdrawals.
That $6,000 IRA contribution cap is limiting if you make more than $40,000 or $50,000 per year. But you can put excess contributions in a taxable brokerage account. You'll pay taxes on the earnings every year, but withdrawals are not restricted or taxed as they would be in a 401(k).
Once your plan is terminated, your employer has to vest you fully in any company-matched contributions then distribute all funds within 12 months. You must roll these funds into an IRA or another 401(k) plan to avoid paying taxes and penalties on the distribution.
2. Your employer might cancel or suspend matching contributions
Hospital operator Tenet Health, hotel chain Marriott International, and furniture maker La-Z-Boy have all recently announced changes to their 401(k) matching programs in response to the pandemic. Tenet Health and La-Z-Boy have frozen matching indefinitely, and Marriott has put off the contributions until September 2020.
If you suddenly find yourself without matching contributions, there are two steps you can take right away to maintain your savings momentum. First, don't panic. Once panic sets in, you might be tempted to pull back on your own contributions to hoard cash. Know that employers also walked away from matching contributions during the Great Recession in 2008. Most of those moves ended up being temporary; the benefits were restored once the economy stabilized.
Second, increase your own contributions if your job outlook is stable. You're likely to be spending less on gas and dining out these days, anyway. Direct some of that savings into your retirement account, even if it's a temporary move until shelter-in-place orders are lifted.
3. Your employer might reduce matching
Finally, your employer might keep the matching program but change the formula. If your plan has a generous match -- say, 100% of your contributions up to 5% of your salary -- there's plenty of room for the employer to dial that back to conserve cash.
If you receive notification that your matching contributions are changing, make sure you understand the new formula and how it alters the dollars going into your 401(k). If possible, increase your own contributions to make up the difference. Remember, too, that higher contributions will lower your payroll taxes. That means the net change in pay of a small contribution increase might be marginal.
Keep on saving
As long as you're still earning a paycheck, keep on setting money aside for the long term. A 401(k) with a healthy company match does make saving easier, but you can build ample wealth for retirement outside of a 401(k), too. The important task on your shoulders is to continue saving and investing, no matter what crazy conditions this world throws at you.