Disturbing Trend on the 401(k) Front

While the numbers indicate that workers still are stashing cash in their employer-sponsored 401(k)s, the news is not all good and requires many workers to take action now to catch up (Money August 2009).

A recent survey of 2.7 million eligible employees by Hewitt Associates revealed that 401(k) participation rates have increased from 67.2% in 2005 to 74.2% in 2008, thanks in part to auto-enrollment programs. And 15.4% of 401(k) participants increased their contributions in 2008. But that's the end of the good news.

Here's the bad news:

• Almost 15% of 401(k) participants decreased their contributions in 2008;
• Workers who cut their contributions did so by an average 6.3 percentage points; and
• About 5% of workers stopped saving money altogether in their 401(k) plan in 2008, compared with 3.6% on average each year from 2003 to 2007.

If you've voluntarily cut back on saving, or if you've experienced a reduction or loss in workplace retirement benefits due to stock market losses or company cutbacks, take action and start to play catch-up as quickly as possible:

• Boost your 401(k) contributions. Losing the company match doesn't mean you should stop contributing. Research from Hewitt Associates revealed that the average employee could bridge the gap caused by a 401(k) match suspension by increasing contributions just three percentage points a year.
• Redirect spending leaks to personal savings. Start--or beef up--an emergency fund. This is particularly important if your job is in jeopardy. Ideally, you want three to six months' living expenses handy in a liquid, interest-bearing account in case you need cash quickly. After you've built up a solid emergency fund and you're maxing out your 401(k), then consider an IRA (individual retirement account).
• Resist the urge to cash out. If you're in the 25% federal tax bracket, a $50,000 withdrawal before age 59 1/2 will cost you $12,500 in federal taxes, $3,500 in state taxes (assuming a 7% state tax rate), and $5,000 because of a 10% early withdrawal penalty, according to Fidelity. That means your $50,000 withdrawal from retirement savings shrinks to $29,000.
• Take another look at your retirement plans. As painful as it may be, rerun the numbers in light of lower balances and economic uncertainties. Use several retirement calculators to figure out how much more you need to save to reach your goals. Check out Choosetosave.org/ballpark/ and Bankrate.com (click the Retirement tab then scroll to Calculators).
• Know when you're vested. If your employer terminates your 401(k) plan because of bankruptcy, merger or acquisition, remember that any pre-tax contributions you made, plus earnings, are yours to keep. The company's vesting schedule, though, determines whether you're entitled to the employer contribution portion. If you're not sure when you're vested, contact your company's human resources department.