Workers have seen the value of their retirement accounts slashed in recent months. Yet the latest news on the labor front calls into question the entire viability of the employer-sponsored retirement plan system.

Increasingly, employers are economizing by cutting back on their matching contributions to their 401(k) plans. Among the companies recently making cuts are General Motors (NYSE:GM), Dollar Thrifty Auto Group, and Lee Enterprises -- all of which cited the cost savings coming from the measure as a motivating factor.

This isn't the first time that companies have used matching-contribution cutbacks as a cost-saving measure. Back in 2003, Charles Schwab (NASDAQ:SCHW) suspended its matches -- a somewhat ironic move, given that the company itself benefits from administering 401(k) plans for employers.

However, considering the extraordinary pressures the weak economy is putting on corporate America, there's greater fear this time around -- fear that the cuts may be permanent, and that this once-valuable employee benefit may be disappearing for good.

End of an era
If companies stop making matching 401(k) contributions, it would mark the end of the last token effort businesses make to help provide for employees, not just during the time they're employed but also after they retire. Already, 401(k) plans take most of that responsibility away from employers.

Traditionally, pension plans required businesses to make sure they saved enough and got good enough investment returns to fulfill monthly payment obligations for the remainder of their retired employees' lives. If the stock market didn't live up to expectations, it was up to companies to figure out how to cover the shortfall.

But a few years ago, many employers, such as IBM (NYSE:IBM), Verizon (NYSE:VZ), and Motorola (NYSE:MOT), started freezing pensions in favor of defined contribution plans, in which much of the burden of saving for retirement instead fell squarely onto their employees' shoulders. Workers had to figure out how much to save and how to use the often limited investment options to their best advantage. If things didn't work out, well, that was tough luck for employees -- but beyond kicking in a few percent for a match, employers could avoid the substantial financial risk of managing a long-term pension plan investment portfolio.

What to do
If your company plans to stop making matching contributions to your 401(k), it essentially puts your employer-sponsored plan on a par with IRA options you already have. The sole benefit is in the much higher contribution limits for a 401(k) -- $15,500 this year, rising to $16,500 for 2009.

Before you give up on making 401(k) contributions, however, consider these specific factors:

  • What's the tax deduction worth to you? With 401(k)s, workers get an easy way to shelter fairly large amounts of income from current tax. That's incredibly valuable, especially if you're in a high tax bracket. If your tax burden is fairly low, however, you might prefer simply to make long-term investments in a regular taxable account. You'll give up a tax deferral, but you retain more flexibility to use your money for any need you encounter throughout your lifetime.
  • What investments will you make? If you own individual stocks or stock mutual funds in a 401(k), you give up some of the tax benefits that shareholders get in taxable accounts. One is the 15% maximum rate on capital gains and dividend income. The calculations can get complicated, but stock investors who intend to buy and hold stocks for extremely long periods of time may end up better off holding their shares in a taxable account -- especially shares with little or no current income payouts, such as Apple (NASDAQ:AAPL) and Rambus (NASDAQ:RMBS). That's as long as those preferential rates continue into the future.
  • What fees will you pay? Many have criticized 401(k) plans for their high costs. If your only options involve high fees, you may be better off finding low-cost alternatives. Even held outside a tax-favored plan, the lower costs could more than offset the loss of tax benefits.

It's unfortunate that companies see cutting back on retirement contributions as a viable option to keep a productive workforce. Unfortunately, though, the current tough times are forcing employers to make hard choices -- and employees facing possible layoffs aren't in the best bargaining position to argue. Make the best of a bad lot and take responsibility for doing your own retirement saving -- whether you use your 401(k) or not.

For more on dealing with the challenges of retirement, read about:

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis -- even one of our own -- helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.