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Kiersten Essenpreis for Money

In the investing world, it's one of the few rules of thumb that applies to everyone: If you have a 401(k) plan, invest at least up to the level of the company match.

It’s free money, after all. But what about when that company match goes away –- then what?

In times of financial crisis, when liquidity is at a premium and companies are trying to hold onto every nickel they can find, guess where they sometimes look for cuts? The employee 401(k) match.

Firms Taking Action

We're already seeing some employers planning to reduce, suspend or delay their 401(k) matches as a result of the coronavirus crisis. Hotel giant Marriott, travel-booking firm Sabre, Amtrak, La-Z-Boy, and Tenet Health have all announced that changes to matching programs are in the works.

“I think it’s only the tip of the iceberg,” says Alicia Munnell, director of Boston College’s Center for Retirement Research. “I wouldn’t be surprised to see twice as many discontinued matches, compared to the financial crisis of 2008-9.”

As Munnell points out, we've seen this movie before. During the last financial crisis, more than 200 American companies suspended or reduced their 401(k) matches, according to Center for Retirement Research data. It ended up affecting 4.9% of all 401(k) participants.

Happily, that didn’t last forever –- around three-quarters of companies reinstated their match within a couple of years, according to research by consulting firm Towers Watson (now Willis Towers Watson).

But for individual savers, it’s a kick in the teeth. Employers with plan matches contribute a yearly average of $4,040 to every employee’s retirement savings, according to investment giant Fidelity -– so if that's reduced or erased, it can create real consequences for your retirement projections.

Just a single year of missing that $4,040 employer match, for instance –- if we assume 7% returns compounded annually –- would add up to $30,753 less in 30 years.

What to Do If Your Plan Is Affected

So if the traditional personal-finance advice of contributing up to the level of the employer match no longer holds, what is your new 401(k) playbook? A few thoughts:

-Immediate needs come first. If your family finds itself in a cash crunch, and you need that additional money to put food on the table or a keep a roof over your head, it’s okay to reduce your own 401(k) contribution along with your employer’s. Emergency cash reserves are handy for all sorts of reasons; we all hope this is temporary, and that retirement contributions can go back to normal on the other side. “With many people in crisis and survival mode, emergency sources of funds to sustain life have to take priority,” says Larry Luxenberg, a financial advisor in New City, N.Y.

-If you can, boost your contributions. On the flip side of that, if your job is secure and you are financially able, then you can crank up your own contributions to make up for that missing match. This is painful in the short-term, but it will keep your retirement projections on track – and upping investments in a bear market, over the long-term, is a winning strategy. “If you needed 10% of income to reach a goal, and you were contributing 5% and the company 5%, you are now responsible for the whole 10%,” says David Shotwell, an advisor in Lansing, Mich. “Your future needs don’t go down.”

-Remember the tax benefits. Investing in a 401(k) plan isn’t just smart because of the employer match. It’s also a wise tax strategy; because contributions are pretax, it reduces your taxable income for April 15 (or rather, July 15, the new filing deadline for federal and many state taxes due to the coronavirus). If you stop contributing, you may get an unwelcome surprise in terms of how much you owe Uncle Sam.

-Consider other retirement vehicles. If one of your major drivers for focusing on your 401(k) has vanished, then you might want to look at bolstering other retirement vehicles. A Roth IRA, for instance, takes in after-tax contributions, but then future withdrawals of principal and earnings are forever tax-free. That will give Future You more flexibility in how you handle your retirement savings, depending on what future marginal tax rates are.

Don’t get too dejected by projecting employer match suspensions far into the future, though. If history is any guide, it won’t be a permanent situation. Says Charles Adi, a planner in Houston: “This time shall pass – and your employer match will return.”

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