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Retirement Planning: What to do if the Company Match Disappears February 11, 2009

Posted by retirementwithaplan in From Retirement Planning for the Utterly Confused, retirement.
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I distinctly remember the conversation four years removed. I was appearing on local morning talk show when I was cornered by a producer in the parking lot. In the chill morning air, she shivered as she asked me whether she should invest in her company’s 401(k) plan if her company did not match? Now this problem is not just hers. According to a recent study, it is becoming common practice as a cost-cutting measure for more and more companies, businesses that once used the strength of their retirement generosity to lure and keep good talent.

pen020609The 401(k) – a defined contribution plan, which replaced numerous pension plans (a defined benefit plan) had similar intentions. The repayment of capital in exchange for loyalty and the employee’s contribution of their human capital. Hewitt’ Associates offers human resource tools for numerous Fortune 500 companies. In a recently released annual survey of almost 150 mid- to large-sized employers, they found “that half (51 percent) currently offer automatic enrollment (up from 44 percent in 2008). However, among the companies that don’t currently offer the feature, only one-quarter (25 percent) are somewhat or very likely to add it for new hires, and just 15 percent are likely to adopt it for existing employees in 2009, down from 57 percent and 27 percent, respectively, in 2008.”

Does the lack of trust a company might have in their plan offerings show us something deeper, perhaps darker for the future of these types of plans? Company matches began to fall to the wayside in 2008 with some businesses taking the step even before the market’s took their nosedive. The survey suggests that more will follow suit in 2009 with a full 10% of the businesses that now offer a match will suspend such activity in the next 18 months.

Referred to as a costly discretionary expenditure, matching contributions and automatic enrollment (which forces the employee to participate at least up to the matching funds level in many instances) are now seen as something they can use to control overall costs. They are doing this as they try to direct employees into lower-cost alternatives within their plans. Target-dated funds seem to be the employer’s answer to fiduciary responsibility.

This alternative, while seeming to be a good choice on the surface, may offer the employee a too conservative approach to a long-term endeavor like retirement. Many of these funds, all with a date signifying your planned retirement goal, attempt to reallocate funds with each passing year, adding more conservative funds to the portfolio mix as the plan ages. For instance, a 2030 fund would be focused on protecting whatever assets you have for a potential retirement in twenty or so years.

My contention with these types of funds is twofold. They are unproven and may not work as well as some folks would expect. To get the most out of a target-dated fund, the employee would need to contribute the maximum allowable without wavering. And even then, it might no t be enough.

The second is the proximity factor to growth. If you pick a fund that is set to mature in 2030, you probably are robbing yourself of numerous growth years. If you feel as though you will be working for the rest of your life today, why do many of us pick our dream retirement date and match it with a fund choice? It’s human nature. If we planned on picking a date twenty years beyond our retirement “dream” date, we would get the most from our tax-deferred status (deferring taxes on low tax funds defeats the purpose of what a 401(k) should do – keep bond funds and index funds in a taxable account outside your 401(k) plan).

Keep in mind, many of these funds are “fund of funds” type investments. A mutual fund family will invest in numerous funds within its own group. This has turned out to be an opportunity for the fund family. Poorly performing or under-capitalized funds are invested in by the newly created target-dated fund. Almost everybody wins – but you. The company saves money. The mutual fund sells its dogs to itself and then wraps itself up in a nicely dated fund. And you are left with fewer choices and no match.

No matter.

Keep investing as much as you can. Avoid rolling badly beaten up funds in your plan into target-dated offerings. Keep them and keep them funded.

Here’s what you should be watchful of in the coming months. The push to better education will put the fund administrator under increased pressure as companies look for better (less-expensive) governance. This means more internet based education, which Vanguard has discovered is wholly underutilized by employees when they began offering it. Education will also be focused on diversification (and the push will be towards target-dated funds to achieve it) for those that seemed to react in a knee-jerk fashion when it came to their investment strategy.

Your company may begin offering a Roth 401(k). Avoid it unless you are among the top wage earners. This protective measure preserves wealth and for the vast majority of us who never have fully funded our plans in the first place, this is not a good alternative. It is a good tax move for none but the wealthy.

As you close in on retirement, expect the promotion of annuities (part insurance, part mutual fund, part not-worth-it) as a rollover option. This produces unnecessary fees for the employee and a tidy profit for the company.

No match; no matter. Keep the fund as fully funded as possible and with any luck, the pendulum will swing in the opposite direction in 2010.

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