What to do if you lose your 401(k) employer match

A 401(k) retirement plan is one of the best ways to save for your golden years, and many Americans take advantage of the free money that companies provide as an “employer match” on your contributions. It’s a great way to accelerate your retirement savings, something that most Americans say they’re behind on. But what should you do if your company cuts that valuable benefit, perhaps during a recession?

While experts generally recommend saving as much as you can in your 401(k) plan, you’ll want to consider many other options, including not contributing at all. Here’s what to do if you lose your ongoing 401(k) employer matching contributions and what alternatives you may have.

How 401(k) matching contributions work

The 401(k) plan is one of the most popular retirement savings programs in the U.S., and the company match is one of the easiest ways for workers to quickly accumulate extra retirement funds. Workers contribute directly from their paychecks, and the company contributes additional funds, often as much as 3 to 5 percent of the worker’s salary each year, depending on the plan.

Some employers require that matching contributions vest over time, usually three to four years. Often, a portion of the employer match will vest each year, giving you legal ownership of it. So you may not have a full claim on the matching contribution until a few years have passed.

A 2019 study by Natixis Investment Managers of 700 workers with defined contribution plans such as a 401(k) found that the top reason (56 percent) for participating was the company match. And 57 percent said that a larger match would incentivize them to save more.

Assess your financial picture

It’s definitely a shame if your company cuts its matching funds. But if it has, you’ll want to do two things at first:

• Determine why the company cut the match and its overall financial health.
• Assess your own financial health.

By looking at these two factors you’ll get a better read on what kinds of actions are best for you.

“First, is your company healthy enough to survive this period,” says Nicholas Stuller, founder at MyPerfectFinancialAdvisor in West Cornwall, Connecticut.

Did the company cut its matching plan because it’s in serious financial trouble that it’s unlikely to recover from, or is the problem more short-term in nature?

But you’ll also want to get a read on your own personal finances. Could you muddle through if one spouse lost a job? Do you have money stashed away in an emergency fund such as a high-yield savings account – not the stock market – that is essentially risk-free and easily accessible?

What actions you can take

Depending on your assessment, you may have several courses of action. Importantly, continuing to contribute to your retirement plan won’t always be the best path to take. It’s critical to make it through to the other side of tough times without ruining your financial health. Taking on loads of debt during a downturn may hurt your long-term future more than not saving for a year or two.

“If your company has simply decided to no longer match funds, then there’s nothing you have to do,” says Michelle Sloan Jones, chief external affairs officer of Money Management International, a nonprofit in financial education in the Atlanta area.

1. When your company is in poor financial shape

If your company is not healthy, Stuller recommends looking to shore up your own personal financial and career situation before worrying about retirement, a move that others echo.

One of the first options is to get your emergency fund in order while you can. Experts recommend having at least six months of expenses on hand, but in tougher times having more is not going to hurt you. You can always return to contributing to your retirement accounts later.

“If you are already struggling to make ends meet or are uncertain about the security of your job, put more cash into a liquid savings account instead,” says Laura Hearn, advisor at Brighton Jones in Chicago. “Why? If you increase the savings to your 401(k) and find yourself crunched for cash, tapping into your 401(k) savings can be costly.”

Hearn notes that early 401(k) withdrawals will incur a 10 percent bonus penalty on top of any taxes already due on distributions if you’re under age 59 1/2.

“If you can’t make up for the lost match this year due to uncertainty of cash flow, don’t fret,” says Hearn. “One year of not having a company match savings is unlikely to derail your long-term financial plan.”

From here, you can start thinking about the next best move, both financially and career-wise.

2. When your company appears relatively stable or healthy

If the company and your personal situation are stable, then you’ll have more options. But even then you may still want to shore up your finances before you commit to further retirement savings. From there you have a few avenues you can consider.

“If [your company] is healthy, then can you afford to personally make up the match and continue to save? If so, do it,” says Stuller. “Consider paring back other expenses to re-allocate those monies to savings if you can.”

But without the match, workers are missing out on one of the most important benefits of a workplace retirement plan.

“Continuing to contribute to your retirement is highly recommended but, without an employer match, the only real benefit to staying with your employer’s plan is convenience,” says Jones.

Still, it can make sense to stay in your employer’s plan for other reasons, such as a good selection of funds and the convenience of having money invested straight from your paycheck.

“If the company has promised to restore the match in the near future, it may be in your best interest to stay put,” says Jones. “But if not, assessing plan performance should be your next step. If you find stronger performance and better gains elsewhere, you can always choose to voluntarily move the funds.”

On the one hand, you can roll that 401(k) money into an IRA – either traditional or Roth IRA – but you’ll want to understand the advantages and disadvantages of such a move. You have other alternatives to your company’s 401(k) plan, and even a taxable brokerage account could be a good option if you need penalty-free access to your money.

On the other hand, don’t be in such a hurry to move the money, if the company is in otherwise solid shape, as experience from the global financial crisis shows.

“Remember, employers by and large returned to making matches once the economy recovered,” says Steve Parrish, co-director of the Center for Retirement Income at the non-profit American College of Financial Services.

Should you always contribute to your 401(k)?

If your job and personal finances look secure, then adding to your retirement savings is a great option. Some experts recommend always opting for retirement savings.

“The most important step consumers can take is to continue contributing to their retirement plan because contributions are automated and therefore help you to systematically invest,” says Pam Krueger, CEO of Wealthramp in the San Francisco area. “Then there’s the benefit of tax deferral on those 401(k) contributions.”

“Call it behavioral finance or human nature: If you continue to contribute, you’re less likely to touch your savings,” says Parrish.

By keeping up the commitment to your retirement account, you’ll tend to see it as untouchable money that must be maintained for your future, allowing the money to compound tax-free over many years. Still, you have to balance the future against your present needs.

“I’d also encourage consumers to look for every dime of benefits at work you may be ignoring, like health savings accounts (HSA),” says Krueger. “These are triple tax-advantaged accounts that can be used for qualifying medical costs in retirement and you don’t lose the funds like flexible spending accounts (FSA).”

What happens to your 401(k) if you aren’t vested?

When it comes to 401(k) matching, it’s very important to be aware of how vesting works. In many cases, the match may not be all yours right away. While your contributions always belong to you, the money from your employer may be required to vest — potentially for years — before you can claim ownership.

During this time, you’ll need to remain an employee of the company until the match amount goes through the required vesting period. Otherwise, you’ll forfeit any matching funds that are unvested.

Bottom line

Contributing to your retirement savings – and your future financial security – is important, but you’ll want to carefully assess your own financial situation to see if continuing your contributions during uncertain times really does make sense for you. If it doesn’t, shore up your finances and then return to your retirement savings as soon as it does make sense for you to do so.

“Most importantly, 401(k) investors are reminded to ‘know thyself’ — what are your goals, what is your situation and what kind of volatility comes with your return requirements,” says Tim Shaler, former economist in residence at iTrustCapital in Encino, California.