Here’s a bit of good news for workers with 401(k)s — about 80% of firms that reduced or suspended employer matches in the dark days of 2009 are planning to restore them this year.
A survey by Hewitt Associates (Stock Quote: HEW) finds employers increasingly concerned that their employees aren’t saving enough for retirement, and aren’t doing a very good job managing the savings they do have. The study looked at 160 mid- to large-sized companies with a total of 5.7 million workers. Fewer than one in five companies said they were confident their employees would save enough.
Last year, many companies trimmed employer matches to save costs. In many cases, a match is a key reason for investing in a 401(k) that otherwise may not be terribly appealing, perhaps because the investing options are not very good. Most financial advisers recommend that employees contribute at least enough to get the maximum match available. Otherwise, you’re just leaving money on the table — like passing up a raise.
Plans vary, but many employers offer to match as much as 3% to 6% of the employee’s annual salary. For someone making $75,000, a 6% match would be worth $4,500. If that increased by 2% a year as the employee’s salary grew, it could add about $240,000 to the employee’s account after 20 years, assuming 8% annual returns. (Use the Savings, Taxes & Inflation Calculator to play with the figures.)
Like the employee’s contribution, the match is tax-deferred — not included in taxable income during the year the match is received. The match and earnings it generates are taxed as income when money is withdrawn.
Is there ever a reason to turn down a match? No. Many companies use their own stock to make matches. As a general rule, it’s not a good idea to invest too heavily in your employer’s stock because that is putting a lot of eggs in one basket. And, the fact is, many companies have lousy stocks.
But even a bad stock is preferable to passing up a matching contribution. After all, you have a legal right to sell company shares received through a match after three years. Shares bought with your own contributions can be sold at any time, though it’s probably not a good idea to load up on those if you’re already getting shares through a match.
In addition to its findings on matches, the Hewitt study found employers putting greater emphasis on automatic investing plans in their 401(k)s. That includes features like automatic enrollment, automatic rebalancing of various investment classes, and automatic increases in contributions over time.
Automatic features can improve results for employees who won’t take the time to manage their accounts themselves, or don’t know how to. But employees who are capable of making sound financial choices should not leave their plans on autopilot, since the automatic choices are often overly conservative.
Fortunately, the Hewitt survey also found more employers are planning to offer employers more services to help them make sound decisions.
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