One of the most unfortunate casualties of this recession for employees of man small and medium sized companies has been the elimination of the match on the 401K. Matching 401K contributions is a substantial cost for employers, but one that most are willing to pay because it’s a nice benefit to attract and retain employees. Companies that provide a match have about a 10% higher participation rate in their 401K plan as employees take advantage of those free dollars. A company match is a 100% return on your investment, something that should never be taken lightly.
According to a recent survey, about 8% of companies have eliminated the company match as a cost cutting measure in response to the recession. Most of these companies say that they intend to restore the match as they become profitable again, but few have done so. Without a company match investing in a 401K is still certainly a worthwhile endeavor, but there may be better uses for the money you’re setting aside from every paycheck.
- Invest In An IRA: If your goal is to save toward retirement, an IRA might be an attractive option compared to a 401K. The downside is that the contribution limits each year are lower than in a 401K, but if you’re setting aside a small percentage every month, a self directed IRA has the same tax benefits as a 401K but allows the owner to invest in essentially any type of security instead of choosing one of the few mutual funds offered in the 401K plan. This investment flexibility becomes much more attractive without a company match in the 401K.
- Pay Down Debt: If you have credit card debt, you could very easily be better off taking a bite out of the amount you owe than adding to a 401K without a match. The money your investments in a 401K can earn should be in the neighborhood of 8-10% over time if history is any indication, but most credit card debt is costing you 20% or more every year in interest. Paying down the debt becomes a wise choice when you’re not missing out on a company match.
- Build Your Emergency Fund: A savings account is something that everyone should have and most financial planners will tell you that it’s a good idea to have at least 6 months worth of living expenses set aside just in case. In an uncertain economy like this where hundreds of thousands of jobs are still eliminated every month, having more than usual set aside is a great idea. You lose the tax write-off and tax deferral, but you gain liquidity.
- Pay Down Your Mortgage: Owing less on your home is never a bad thing, especially with housing prices under pressure. If you’re thinking of refinancing but your loan-to-value ratio is higher than it needs to be, you could make an effort to increase your equity in your home and increase your chances of being approved if you decide to refinance–there are always ways to tap into that equity later if you need it once the financial industry rights itself again.
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Tags: 401k Contributions, Match
Posted October 28, 2009 by Admin under Financial News