The suspension of a 401(k) match for just one year could shrink your nest egg by thousands of dollars in retirement. A 30-year-old worker earning $50,000 annually who contributes 6 percent of his salary to a 401(k) and previously got a 50 percent match will have $16,000 less in retirement if the match is suspended for just one year, according to a new analysis by Hewitt Associates, a human resources consulting firm. That number jumps to $48,000 if the employee stops contributing to his 401(k) as well. If that worker becomes discouraged and stops saving altogether for 5 years he will have $150,000 less for retirement, Hewitt calculated. The calculations assume the employee will recieve a 3 percent annual raise and 7 percent returns on investments.
About 34 percent of U.S. employers have reduced or eliminated matching contributions to their 401(k) or similar retirement plans since January 2008, according to an online poll of over 150 plan sponsors in February 2009 by Chicago-based wealth-research firm Spectrem Group. Another 29 percent of plan sponsors intend to cut the match over the next 12 months.
The savings for the company are huge. An employer providing the average contribution – 50 cents for each dollar the employee contributes up to 6 percent of pay – saves the company an average of $1,500 per employee or more my eliminating the employer contribution, Hewitt found. The typical company savings are $2 million annually for a small company with 2000 or fewer workers, $10 million for the average mid-sized company, and $25 million a year for the typical large U.S. company with 15,001 or more employees.
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