Don’t be surprised if your employer pauses its contributions to your 401(k) plan during the U.S. economic downturn.
As the coronavirus pandemic wallops the economy, and businesses deal with dropping revenue and limited cash flow, employers are exploring how to trim their obligations to those plans without violating federal regulations. Companies commonly give to worker’s accounts either through a match (up to a certain amount) or other contribution.
Plan sponsors “have been calling regarding how they might legally reduce their contributions to plans to preserve their cash positions,” said Marcia Wagner, founder of The Wagner Law Group, which has heard from both privately held and publicly traded companies.
“Employers need to know their options to try to navigate through this crisis,” Wagner said.
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About 95% of employers offer either a company match or other type of contribution, according to 2019 data from Vanguard. Half of the plans it services provide a company match, while a third offer both a match and non-matching contribution (i.e., profit sharing), and 10% do only the latter. The average amount employers kick in is 4.3% of a participant’s salary.
In 2008-2009, the last time the U.S. economy hit the skids, about 18.5% of companies that offered a match pulled back, either through suspending or reducing the amount, according to a 2009 report from the Plan Sponsor Council of America. Of plans that offered non-matching contributions, 26% suspended or lowered those amounts. And, most companies that suspended their contributions saw a decrease in plan participation, the PSCA report says.
Of course, it also shows most companies made no pause or reduction to contributions — 4.5% actually increased them — during the last U.S. recession. This time, however, experts are concerned that this economic downturn could result in a greater share of companies needing to pause the practice until they’re on sold financial footing.
“The crisis we have now is different … there’s been a rapid pace of layoffs and furloughs, and companies have had to suddenly shut down,” said Will Hansen, executive director of the PSCA.
Hansen said that in locations where the coronavirus has been present longer — e.g., Seattle — some companies have sought advice on how to immediately stop contributions. Generally speaking, the plans seeking relief are so-called “safe harbor” plans — they agree to certain employer contribution requirements so they can escape certain other regulations. They are often favored by smaller companies.
Under current law, companies have to give a 30-day notice to participants that the employer contributions will stop, Hansen said.
“We’re advocating that the IRS put out guidance saying you don’t have to do that, which is what the agency did in the 2008-2009 crisis, as well,” Hansen said.
For 401(k) savers, financial advisors generally recommend that you continue making contributions regardless of whether your company does the same — if you can afford to.
“In times like these … it’s okay to temporarily suspend your 401(k) contributions if you’re feeling really insecure about the amount of cash you have available,” said certified financial planner Doug Boneparth, president of Bone Fide Wealth in New York. “During bad times, cash is lifeblood.
“It puts food on the table,” he added. “If the worst doesn’t happen and you don’t lose your job, you could make up contributions later in the year.”