Millions of individuals have been hurt by the coronavirus pandemic -- namely, those who have lost their jobs since the outbreak began. But companies are feeling the pain, too, and are cutting corners to try to conserve resources.
One area they're cutting is 401(k) contributions. A good 8% of employers have reduced their 401(k) contributions in recent months, reports the Plan Sponsor Council of America, and more are considering joining their ranks.
All told, an estimated 46,000 plans have seen their employer contributions cut. For some, that meant losing an employer match altogether. For another, it meant a reduction.
Not surprisingly, small businesses were most likely to reduce their contributions. But either way, losing out on 401(k) dollars puts employees in a bad spot, and if those reduced contributions continue into 2021, savers will need to work even harder to compensate.
A blow to savers
Losing out on employer funds for a 401(k) plan can constitute a serious setback -- even if that reduction is just temporary. For someone who normally gets $2,000 annually in matching dollars, losing that sum for even a single year could have long-term consequences when we factor in missed investment growth. That's because $2,000 invested over 40 years at an average annual 7% return, which is a few percentage points below the stock market's average, could result in almost an extra $30,000 in accumulated savings. That's a lot of money to give up.
Another problem is that losing an employer match might demotivate some people to fund their 401(k)s. And that could constitute a double whammy.
Compensating for a reduced employer contribution
If your company has cut back on 401(k) contributions due to the effects of the pandemic, or even for a different reason, then your best bet is to save more of your own paycheck to avoid falling short on retirement income down the line. Remember, you'll need income outside of your Social Security benefits to pay the bills as a senior, so the more you're able to save, the less financial stress you'll encounter later in life.
You may need to rework your budget to carve out more room for 401(k) contributions in the coming year, or even pick up a little work on the side to eke out those funds. But your goal should be to make up for as much of your lost employer contribution as possible.
That said, if your reduced employer contributions are pandemic-related, there's a good chance they'll be just temporary. As such, the sacrifices you have to make to compensate may be temporary as well. Keep that in mind as you make changes that allow you to stay on track with your savings and avoid a financial crunch down the line.
Of course, if your employer makes it clear that an absent 401(k) match is here to stay, you might instead look to house your savings in an IRA. That way, you'll likely pay lower fees, all the while gaining access to a wider range of investment choices that help you achieve your goals.