Your Employer Suspended Its 401(k) Matching During COVID-19. Now What?

About the author: Lamar Watson, CFP®, is a Fee-Only Financial Advisor in the Washington, D.C. area, that works with clients virtually across the country. Lamar's work with his clients focuses on budgeting, employee benefits, paying down debt, buying their first home, and investing. Lamar is the Founder of Dream Financial Planning, a virtual financial planning firm specifically designed to help young professionals and minorities take control of their finances and fulfill their dreams. Feel free to schedule a complimentary consultation to learn how we use the The DREAM Financial Planning Process ™ to help our clients achieve their goals. 

According to a recent survey by the Plan Sponsor Council of America, 16.1 percent of organizations have suspended matching employer contributions due to financial hardships caused by COVID-19. Worse yet, 1.3 percent of businesses have terminated their 401(k) plans altogether.¹ Millions of Americans rely on their 401(k) and matching employer contributions to bolster their savings for retirement.

If your employer has recently made an adjustment to its 401(k) offerings, you may be considering how this could impact your future retirement - and what next steps you should be taking.

Why Are Employers Changing Their 401(k) Plans?

COVID-19 has had a tremendous impact on businesses around the world. With most states implementing stay-at-home orders, businesses have been forced to reduce hours or cease operation altogether. With Americans encouraged to stay home throughout March, April and May, foot traffic all but vanished across America for more months.

Even as states begin relaxing measures and stores start opening back up, America remains suspended in a fairly volatile market. People are worried about what’s to come, they’re strapped for cash and not willing to spend like they used to. In return, businesses are suffering and searching for ways to save. One of the first things to go is often, unfortunately, employer-sponsored benefits such as 401(k) plans or their matching contributions.

Is it Legal for an Employer to Suspend Matching Contributions?

In most cases, yes. It is legal for an employer to suspend matching 401(k) contributions. While it may have been an enticing addition to your benefits package upon your hiring, employers do have the power to simply stop offering this benefit. The most important thing an employer can do in this instance, however, is to effectively communicate with employees who will be affected by the change. For example, explaining that cutting these benefits is their solution to avoiding layoffs will likely make employees more understanding and receptive to the change.

If your employer doesn’t provide you with an explanation or any idea of if/when contributions will start up again, speak to your manager or HR department. These are important questions that your employer should be willing and able to answer.

If your employer offers contribution matches to a safe harbor 401(k) plan, they must offer notice to employees 30 to 90 days in advance of suspending contributions.²   

What Should You Do if Your Matching Contributions Are Suspended?

In the case that your employer does suspend matching contributions, there are a few next steps you can take to help maintain and grow your retirement savings.

1. Resist the Urge to Panic

Having an employer suspend matching contributions, even if it’s only temporary, is a sign of the times. We’re facing a global pandemic, the stock market’s unpredictable and people are worried about money. If you’re wondering if you’d be better off draining the account and having that money under the mattress instead, you’re likely not alone. And if you’ve been personally impacted by the coronavirus, you can even withdraw up to $100,000 penalty-free as part of the recently passed CARES Act.³ 

But the truth of the matter is, you should be making decisions about your money with objectivity - not gut reactions and emotions heightened by media. Withdrawing any amount from your 401(k) now will only rob your future retirement. Unless you’re in dire need of financial assistance, this option should be avoided.

2. Talk to Your Financial Advisor

Your advisor’s sole responsibility is to help you make unbiased, educated and objective decisions about your money. Use him or her as a sounding board to voice your concerns and discuss potential paths forward. How will you make up for the missing contributions? What financial impact will this change have on your future retirement? You likely have plenty of questions regarding this change to your 401(k), and talking to your advisor is the perfect place to start.

3. Revisit Your Portfolio & Other Retirement Accounts

The market is volatile and economic confidence is low amongst investors. If you haven’t already, use this as an opportunity to reevaluate your current asset allocations and investment strategies. Your advisor may be able to help you identify potential areas for improvement based on your current tolerance for risk.

4. Increase Your Own 401(k) Contributions

While your employer may have slashed matching contributions, that doesn’t mean you still can’t contribute to your 401(k). If you have the means to do so, consider upping your contributions, for now at least, to help offset the loss of any missing contribution matches.

Remember, the contribution limit for a 401(k) increased in 2020 to $19,500. If you’re over 50, you’re allowed to contribute an additional $6,500 in catch-up contributions.⁴

If your employer recently suspended its 401(k) matching contributions, it’s likely this is a temporary cut in benefits. Even so, every penny counts when it comes to preparing for retirement. Work with your financial advisor to understand the impact this may have on your future retirement earnings and what you should be doing right now to make up for any lost funds. 

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