I Watched As Employers Stopped Retirement Matches — Then It Happened To Me
I watched with an academic’s remove as employer after employer stopped contributing to their employee’s retirement funds starting in March. Then it happened to me.
I was alarmed, but not really surprised, when my university eliminated their employer retirement contributions last week! It affected my own plans and I feel just terrible about it. Close friends and colleagues asked me what to do. They wanted me to ask the new college president to allow pay cuts instead of retirement cuts. After all, most workers would rather have the retirement contribution (unless they are liquidity constricted). And, if the university couldn’t change their minds my colleagues asked me what they should do.
Here are some practical suggestions about how to cope when your employer stops the match. (Just know I am not an advisor — I am a close observer of the retirement landscape and have a Ph/D. in economics.)
Suspended matches affects us in very different ways depending on time to retirement, other personal and financial issues, pay, longevity with our employers.
· It’s important to offset the difference so you don’t fall behind in saving for retirement.
· It’s possible to make up for the loss by increasing personal pretax contributions – “maxing out” — or contributing to a Roth IRA, or both.
Although the cut is intended to be temporary, the cessation in contributions can derail retirement goals. Individuals nearing retirement, especially, have tough decisions — whether to increase their contributions, reduce goals, or delay retirement, or do all three. Younger workers have an easier decision — basically you need to save and not withdraw any retirement funds.
The loss of the setback can be lessened by taking a number of steps:
Step 1: Get familiar with your situation right now. For your planning here is a nice retirement calculator from Dinkytown. See how much you are contributing – it is a surprise that many workers don’t know how much they are contributing much less what their employer is contributing. You need to know the dollar amount. Get your last pay slip. You probably will see these items listed in the section about your deductions, pay attention to the items in bold
401 (k) – or 4013(b) — Catch-up- EE (for those over 50)
401 (k) Employee Contribution
(Other items are Dental Pre-tax, Medical FSA Health Care, Medical Pre-tax, Transit Pre-tax)
The employer PAYS FOR THESE ITEMS, the highlights in yellow is what is disappearing.
403(b)- Employer Contributions**
(Other items are AD&D- ER, Dental – Employer cost, Life Insurance- Employer Paid, Medical – Employer Cost MARVEL HOW BLOODY HIGH THIS IS!!)
Step 2: Increase contributions, don’t forget that increasing contributions lowers taxable income so giving up a dollar now for a dollar in your retirement will be less painful because it will reduce current consumption by less than a dollar (the amount depends on your tax rate – high in New York City!).
Here is how you can increase the contributions. Max out your own contribution. What is the maximum contribution limit? If your (the employer contribution doesn’t count) contribution hasn’t reached the 2020 maximum contribution, and the vast majority of workers do not, which is $19,500, with a $6,500 additional catch-up contribution available to those older than 50 (up from $19,000 and $6,000 for 2019) then you can increase your own deferred tax contributions.
If you maxing out replaces the employer contribution you are good to go. But, if not, then you can replace the employer contribution by opening a ROTH IRA.
Step 3: Talk to your tax accountant ASAP about replacing the employer contributions and if you want a full blown financial picture – a super good thing to do now. To find a fee-only, non-conflicted advisor like in order to avoid the more ubiquitous, “guy” who seems like a friend and use the website for the National Association of Personal Financial Advisors, a professional organization for fee-only fiduciary advisors.
You can try to convince your employer to reverse the decision and let employees trade deeper pay cuts for a restoration of the match – most workers would benefit from taking a deeper pay cut and restore the match because of the tax benefit lost when money stops going into a tax preferred account. But from the employers’ point of view cutting retirement contributions is easier, employees don’t feel the pain until they retire and offering choices is hard, especially when the world is upside down because of a pandemic.
Nevin Adams at the American Retirement Association is following the trend, and he is a careful analyst. He is fairly certain that more and more employers will be suspending their employer contributions. It makes sense that travel companies and retailers hardest hit by the COVID-19 recession, including Amtrak, Marriott Vacations Worldwide, Sabre, Macy’s, Bassett Furniture are cutting costs by suspending their matches. But, the recession may be changing norms and we will see more unstable contributions from even stable employers.
Employers are required to give their workers a 30-day notice so I expect a lot more employers will eliminate their match in the next few months. Pro tip — you may need this blog for friends and family. Sadly, we will see the result a few years down the road when even more financially insecure elders live among us.