What to Do When Your Boss Stiffs Your 401(k)

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Wondering why you haven't seen the performance you've hoped for from your 401(k) lately? A big reason may be that your employer is simply not putting what it used to into the account.

One of the best perks of 401(k) plans is the matching contribution that employers traditionally make when workers save money in the retirement accounts. Yet these days, fewer companies are making 401(k) matches: The number of companies offering matching has fallen by almost 7 percent since 2009, according to a study from American Investment Planners.

In other words, more employers are backing even further away from carrying their share of the retirement-savings burden.

Retirement Under Siege

The trend of cutting back matching is just one way employers are taking the scalpel to their benefits budgets.

The AIP study found that 6 percent of 401(k) plans have been terminated outright since 2009. In addition, traditional pension plans that promise fixed monthly benefits for life have seen steeper declines, with a drop of 15 percent in the number of such plans in 2011 alone.

Compared to losing your plan entirely, missing out an employer match may not sound like that big a deal. But over time, the hit to your retirement savings from not having a match really adds up.

Assuming you make $50,000 a year and are able to set aside $5,000 each year, even a modest match of 3 percent of your salary can add more than $180,000 extra to your retirement account balance over the course of your career.
Years of Saving $5,000 In 401(k)Ending Balance If No MatchEnding Balance With Match
10$78,227$101,456
20$247,115$320,731
30$611,729$794,130
Source: Author calculations. Assumes annual investment returns of 8 percent.

Obviously, nobody makes the same salary for their whole career, and investing returns aren't constant either. But as a simple illustration, it makes a telling point. The $182,401 difference in this example adds up to more than three-and-a-half years' worth of salary after 30 years -- and that extra money (if you have it) keeps earning returns when you're retired. With bigger matches, the impact can be even greater.

Should You Give Up On Your 401(k)?

Having your employer abdicate responsibility for helping you prepare for retirement could seem like the last straw. After all, 401(k) plans already have plenty of other shortcomings.

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Companies have been passing on administrative costs to workers in the form of higher fees, in some cases charging fixed amounts that represent a very high percentage of your savings in your 401(k) account. Workers with low 401(k) balances who switch jobs often get kicked out of their plans entirely by their ex-employers. And the average two-income family will pay $155,000 in 401(k) fees to plan administrators over the course of their lives.

Even with those negatives, however, 401(k) plans represent one of your best tools for setting aside pre-tax money toward your retirement. With limits of $17,500 this year -- or $23,000 if you're 50 or older -- it's worth putting up with some downsides in order to reap those thousands of dollars in tax breaks.

How to Handle a Stingy Boss

If your boss stops matching your 401(k) contribution, take a look at other options. You may be better off going with an IRA, which allows you to go beyond the limited investment menu your 401(k) offers and instead choose nearly any investment you want. IRAs offer many of the same tax benefits as 401(k)s, and their added flexibility makes them less prone to high fees.

Moreover, even a regular investment account can work well if you use it the right way. With favorable tax rates for dividends and long-term capital gains, investors who follow a buy-and-hold strategy fare the best in keeping their tax bills low.

Still, if you really want to save as much as you possibly can toward retirement, continue to contribute to your 401(k) -- but keep your eyes open for hidden costs that can sap your overall returns. You can minimize the impact of high fees by sticking with low-cost index funds or similar investments within your plan.
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