Employers Suspend 401(k) Matching

From the Editors' Weblog : The website PensionRights.org recently noted roughly 200 firms that have either reduced or suspended matching contributions to their 401(k) plans since the middle of 2008. Among them: the Big Three automakers, Sears, UPS, Xerox, Black and Decker, and Starbucks.

If your employer follows suit, should you keep contributing to your company plan, or redeploy your resources elsewhere? After all, losing the employer match (or a significant portion of it) undermines a key benefit of a 401(k).

The answer depends on your situation. If you have costly consumer debt, it may be financially advantageous to stop your retirement contributions for awhile and use those funds to pay down debt. Remember, reducing debt — and thereby reducing an interest expense — has the same bottom-line result as increasing an investment return.

Another option: redirect your retirement contributions toward building up your emergency savings. Having a strong reserve could be invaluable if your employer is ultimately forced to cut more than just retirement-plan matching and you find yourself out of work. (See What Would a Stress Test of Your Savings Show? )

If you've already paid off all consumer debt and have your emergency savings in place, a final option would be to redeploy your company 401(k) contributions toward a personal IRA. There isn't much reason to do this if you're generally satisfied with the fund choices in your employer's plan — besides, many employers are likely to re-institute their matching provision when the economy turns around.

But if you're unhappy with the investment choices in your company's 401(k), opening your own IRA might be a good alternative. A deductible IRA offers an upfront tax benefit, but if you think taxes will be higher in the future (and it is certainly looking that way) a Roth might be more attractive because withdrawals in retirement will be tax free.

A word of caution: if you suspend retirement contributions to pay down debt or build your emergency savings, make a commitment to resume your retirement funding as soon as your other goals are met. Procrastination can have a dramatically negative impact on your future nest egg.