No 401(k) match? Save anyway

By Liz Pulliam Weston

Smart savers know a fat company match can really boost 401(k) savings.

The typical match -- 50 cents for each dollar a participant contributes, up to 6% of the participant's salary -- can beef up a nest egg accumulated over a working lifetime as much as 50%.

So it may be a shock to hear that eliminating company matches is a hot topic among human-resources types.

It all started last year, when four Ivy League researchers reported that doing away with a match wouldn't significantly lower participation rates in 401(k) plans in which participants are automatically enrolled. (Automatic enrollment, whereby workers have to opt out of plans rather than sign up, is in place at 44% of large companies, according to Hewitt Associates.)

This challenged long-held assumptions that a match is essential to lure workers into saving for retirement. Now some human-resources experts are wondering aloud whether the money earmarked for matches may be better spent elsewhere, such as on:

• Reducing plan fees, which participants typically pay but which are often hidden in the form of reduced returns.

• Contributing a flat percentage to every worker regardless of his or her contributions, to ensure that even employees who don't feel financially able to contribute still benefit.

• Beefing up other benefits, including health insurance.

A crumbling economy has accelerated the discussion. During and after the last recession, several major employers -- including Ford Motor, Charles Schwab and Bethlehem Steel -- suspended their 401(k) matches as a cost-saving measure. (Schwab and Ford later reinstated their matches, although Ford's match was reduced from its 2002 level. Bethlehem Steel went out of business and sold its remaining assets to International Steel Group in 2003.)

The talk about zapping matches so far is just that -- talk.

"This is very cutting-edge thinking," said pension expert Lori Lucas of Callan Associates, an investment consulting firm. "So far we haven't seen companies reduce their matches or eliminate their matches."

But that could change, she said, particularly if the economy worsens.

It's not the match that matters

Companies "are taking a hard look at their programs," agreed Nevin Adams, the editor of Plansponsor, a magazine for pension-plan managers that recently published an article about the issue. "What's free money to (the participant) isn't free money to the company. . . . It can go away."

Employers wouldn't ax a match lightly, Lucas said. Companies know that matches are a popular benefit, and many wouldn't want the bad press.

That's especially true of employers that have frozen or eliminated traditional plans, Lucas said. They wouldn't want to be seen as abandoning their employees after shifting most of the responsibility for retirement savings to those workers' shoulders.

"There's a lot of sensitivity to that," Lucas said, "even more so than in the past," when 401(k)s were considered supplemental to traditional pensions.

But the research and the ensuing discussion have highlighted something that should have been obvious: You don't need a company match to save for retirement.

Most plans have matches, but some don't, and you can still accumulate a decent nest egg without one. You also can save for retirement on your own if your company doesn't have a retirement plan. Just open an individual retirement plan or Roth IRA at your favorite discount broker or mutual fund company and arrange to transfer up to $416 a month into the account, or $192 every two weeks if you're paid biweekly.

Continued: Do the math

Like it or not, it's your best hope

A lousy match, no match, no plan -- none of these is an excuse for not saving.

To illustrate, let's do some math. We'll assume a worker starts contributing to her 401(k) at age 25, chipping in 6% of her $40,000 salary. Assuming 3% annual salary increases and an 8% average annual return, she'd accumulate $924,153 by age 65. (You can change the assumptions, or figure out how much you can save, by using CCH's 401(k) savings calculator.) Now:

• With a typical 50% match of up to 6% of her salary, her kitty would reach nearly $1.4 million, or 50% more. Clearly, the match seriously helps.

• She could make up for the loss of the match and accumulate the same $1.4 million nest egg by contributing 9% of her pay throughout her working lifetime.

• Of course, if she had a match and contributed the same 9%, her 401(k) could grow to more than $1.8 million, or 33% more than without the match. Once again, she could make up the difference by contributing 3% more of her pay.

Easier said than done? Of course.For some folks, saving anything is a challenge. Those who find it tough to save at all or who got a late start are the ones who need all the help they can get. They should do their utmost to find a job at a financially thriving company that offers a fat match, then contribute at least enough of their salaries to get the full advantage of that match.

For many others, though, it's a matter of priorities. It simply means spending a little less now so you can have a whole lot more in retirement. If your company is willing to help, that's great. If it's not, you still need to save since, matched or matchless, you'll be the one living off this stash one day.

3 game plans

Many financial planners recommend what's called tax diversification when it comes to retirement savings. That means splitting your retirement contributions between accounts that give you an upfront tax break, such as 401(k)s and tax-deductible IRAs, and those that give you tax breaks in retirement, such as Roth IRAs and taxable brokerage accounts.

So if you have a company match at work, you would:

• Contribute enough to get the company match.

• Then max out a Roth IRA (up to $5,000 a year for 2008, more than $6,000 if you're 50 or older) if you qualify.*

• If you can save more, boost your 401(k) contribution.

If you don't have a match at work, you would:

• Split your contributions between your 401(k) and a Roth IRA (if you qualify*) until you max out the Roth.

• If you can save more, toss it into the 401(k).

If you don't have a workplace plan at all, you should:

• Split your contributions between a tax-deductible IRA and a Roth IRA (contribution limit is $5,000 total for both accounts, or $6,000 if you're 50 or older).

• If you can save more, contribute to a taxable brokerage account.*

*You can make a full contribution to a Roth IRA if your modified adjusted gross income in 2008 is $159,000 or less for married couples and $101,000 or less for singles. If you don't qualify, consider putting the bulk of your money into your 401(k) and a smaller amount into a taxable brokerage account. There's no upfront deduction, but you qualify for favorable capital gains rates if you hold your investments for at least one year.Liz Pulliam Weston's latest book, "Easy Money: How to Simplify Your Finances and Get What You Want Out of Life," is now available. Columns by Weston, the Web's most-read personal-finance writer and winner of the 2007 Clarion Award for online journalism, appear every Monday and Thursday, exclusively on MSN Money. She also answers reader questions on the Your Money message board.

Published Aug. 14, 2008