As if people needed more of a reason to be down about their 401(k)s.
Scores of employers, looking to cut and save costs wherever possible, are freezing their matching contributions. And without a matching contribution, persuading individuals to continue participating in 401(k)s is now a much harder sell — especially since the typical 401(k) participant has seen the value of his or her account decline by about 30% over the last year.
But this is where advisers can play a major role in strengthening the foundations of retirement for millions of workers. They should be urging their clients to continue making contributions to their 401(k)s and if possible, suggesting that clients increase their 401(k) contributions until the employer match makes a comeback.
Matching contributions, long described to participants as “free money,” have been the most substantial motivator for many individuals to save in retirement plans. It is a tangible and immediate reward for participating in a long-term savings vehicle, and it is an easy-to-understand return on investment. But now it's simply become a thing of the past for many workers.
One-quarter of employers in the United States have stopped matching their 401(k) participants' contributions, according to the latest figures from a study released last week by The Charles Schwab Corp. of San Francisco and CFO Research Services in Boston.
Only a minority of 401(k) plans have lost matching contributions, of course, but consider that just a couple of years ago that percentage was nearly zero. And the vast majority of these companies that have halted their match have done so in the past few months.
Many employers have indicated that they will bring back the match when — or if — the economy rebounds. But until they do, a growing number of people will become disenchanted with their 401(k)s, and less motivated to save adequately for their retirements.
Advisers must underscore that without the match, it's more important now to save in a 401(k) than it's ever been before. How else will people even come close to regaining some of the losses they've sustained over the past 18 month?
Plain and simple, contributions are firepower for recovery.
Your clients now have the opportunity to let dollar-cost averaging work in their favor: The contributions participants are making to 401(k)s now are allowing them to access the same funds and stocks that were available in their plans a year ago — at a nearly 40% discount in many cases.
So while it certainly would be nice to have an employer kicking in a little extra, your clients' own contributions will likely go farther over the next three years than they did over the last three.
Of course, there are the benefits of making pre-tax contributions to a plan that have always existed with 401(k)s. But more than anything, advisers need to emphasize the opportunities that their clients could be forfeiting if they bail on their 401(k) plans right now.
Quite simply, there's just a new carrot on the stick: The more clients contribute to their 401(k) plans now, the faster they will recover from the free fall in the equity markets.
Free money may make a return — many companies that froze their matches after the dot-com bubble burst did eventually reinstate their contributions.
But no matter how underwhelming the case for saving in a 401(k) may seem at the moment, it has never been more important than it is right now. And advisers' ability to influence the stability of their clients' primary retirement savings vehicle has never been greater.
