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Yes, Your Company Can Suspend Its 401(k) Match

Question: My company recently sent out a memo saying they were going to suspend their matching 401(k) contributions for 2009 and maybe 2010 as well. This could dramatically affect my ability to retire. Are they allowed to do this? --Christine, AZ

Answer: Christine, each company has their own 401(k) plan document which contains its own set of rules that normally allow for the suspension, reduction, increase or termination of matching contributions. Companies include this clause to protect themselves from having to make contributions when profits are slim and to reward employees when profits are abundant.

In late 2008 and early 2009, some companies, like yours, have either reduced or suspended their 401(k) matching contributions. Major industries being affected now include auto, health care, newspaper, gaming, and construction - but many more are considering.

The upside of this cutback/reduction, if you can call it that, is that the alternative was most likely an employee layoff so people are staying employed when their companies cut back on their fringe benefits. So be thankful you have a job.

The downside of this cutback/reduction to you and your coworkers is the loss of many years of tax-deferred compounding and growth on the contribution the company would have made. This could be the equivalent of tens of thousands or hundreds of thousands of dollars over 1-2 decades.

Let’s hope your company can reinstate the company match in 2010. In the meantime, consider saving a higher percentage of your salary or invest more aggressively to offset this reduction/decline. If you’re getting a raise this year, consider putting that raise directly into your 401(k) rather than your pocket.

Bill’s Bottom Line: Don’t count on your company or the government to take care of you in retirement.

Bill Losey, CFP®, CSA, America's Retirement Strategist®, is the resident retirement planning expert on CNBC’s “On the Money”. He has been named one of America’s Top Financial Planners and is the author of Retire in a Weekend! The Baby Boomer’s Guide to Making Work Optional. He also publishes Retirement Intelligence, a free weekly award-winning newsletter. Bill can be reached online at www.MyRetirementSuccess.com.